Venture Capital Investments And Their Impact On Entrepreneurship

Venture Capital Investments: Their Impact on Entrepreneurship

The most challenging aspect of a start-up is getting funds to put their business idea into action. Venture capital is one of the ways startups can get funds to start their businesses.

Venture capital is a long-term investment for the exchange of equity in the business. The capital comes from wealthy individuals or pooled resources from individuals and institutions. Startups do not have to pay any interest on venture capital, nor will they have to pay the money back.

It is quite evident why startups rely on venture capital, despite it being a ‘risk capital', as future profits are not certain.

Let’s take a deep dive into the impact of venture capital on startups.

1. Funding

Venture capital firms help startups with the money needed to start their businesses. Entrepreneurs look for funds to kickstart their projects and move ahead with their business plans. Venture capital has proved to be a comparatively easy way to set the business in motion.

2. Expertise

The aim of venture capital firms is not only about providing funds; they also bring a lot of knowledge and expertise to the table.  One of the major advantages of having venture capital firms is gaining access to various contacts that can help startups expand their businesses.

3. Validation

Young entrepreneurs are not always sure if their business idea can bring results. Venture capital has earned a reputation for validating business ideas. A venture capital investment can be a mark of validation for startups and help them raise more funds in the future.

4. Networking

Startups need contacts of potential customers to sell their products or services. It is impossible for young entrepreneurs to find the right contacts. Venture capital firms can help startups get hold of the right contacts to help them grow their business. The firms introduce startups to potential customers, partners, or mentors who can help them in their journey.

5. Accountability

Businesses need a push to grow and find ways to increase their profit margins. While getting a venture capital investment is easier than traditional ones, you must also remember how the firms need a return on their investments. This accountability motivates startups and pushes them to grow their business to share better returns.

Venture capital investments have proved to be the best way to get funds for startups. The additional benefits add to the advantages. Presently, most startups rely on venture capital firms and look forward to starting or expanding their business with their help. Being one of the best alternative sources of finance, venture capital has helped many businesses grow and assist them with all the processes.

However, it is crucial to be aware of the right process for getting funds from venture capital firms. Here’s an insight.

The Venture Capital Process for Startups

Startups must follow these steps to get funding from VC firms:

• Prepare documents

Startups need to communicate their value to the investors. The documents generally cover all the basic areas of business to help investors get a clear idea. There are a few documents that are similar for all types of startups, namely, one-page teaser, elevator pitch, business plan and pitch deck.

• Acquire technology

Once startups complete compiling the documents, it is necessary for them to share the same with interested investors using the right channels. It is wise to use a virtual data room to help all investors go through your documents.

• Know your terms

It is crucial to understand how you want to use the funds. During the pitch, the founders must also know how much they can extend their offer. As venture capitals share funds in exchange for equity, it is essential to know how much you can stretch before going to the meeting.

• Select appropriate VC firms

With many VC firms mushrooming around, startups need to be cautious with the one they choose. Undeniably, the money is important, but as the investors offer funds in exchange for equity, they will have a say in the company's decisions. Hence, it is crucial to find an investor who will not create any problems and share valuable advice when necessary.

• Field responses

Start-ups must conduct the necessary research to ensure they are on the right track. Generally, the startups who have the potential to earn profits talk to various VC investors to understand the loopholes in their ideas and improve the documents for pitching their business.

• Review term sheets

VC firms share offers to startups they feel are investable. However, it is not recommended to take up the offer with the best quote. You need to be careful and go through all terms and conditions before finalising. Consider going through the terms with your lawyer for better clarity and select an investor wisely.

• Due diligence

The due diligence process must be made simple by the startups. The VC firms take into account how easy the due diligence process is during the deal, along with a detailed look into the documents and a thorough investigation of the business. Using the right kind of technology can ease the process.

• Closing

If the startup has handled all the hurdles and passed due diligence, the management team makes the decision whether or not to accept the offer from the VC firm. Once the contract is signed, the funds get transferred, marking the beginning of a partnership.

Conclusion

Sequoia Capital, Andreessen Horowitz, Kleiner Perkins, Khosla Ventures, and Battery Ventures are some of the top venture capital firms that have funded many startups and helped them grow. Some of the major companies, like Amazon, Facebook, Groupon, Twitter, etc., have raised funds from one of these VC firms during their initial days. It clearly shows the role VCs play in helping startups grow into established companies. So, if you own a startup or plan to own one, consider looking for the best firms and prepare well to start your journey.