Explained In 5 Questions: Venture Capital

In my series of 8 blog posts, I will explain some concepts related to start-up world in very simple words. I would like to begin with Venture Capital because start-up investments are a hot topic lately in my LinkedIn feed. I have been hearing news such as “Company X raised Y million dollars in their latest investment round.” Alright, but who are the investors? What kind of businesses do they invest in and why? In this post, I try to explain Venture Capital concept which is closely related to the subject. I will explain everything as if I am explaining them to Billy. Bear with me.

1. What does venture capital mean? What does a venture capital firm do?

Venture Capital is the investment (money, expertise or both at the same time) that are given to companies and start-ups with a high growth potential.

Companies who provide these investments are called Venture Capital firms. What they get in return of their investment is a certain % equity stakes of the company they invested in. Their ultimate aim is to have a profitable return on their investments. They usually hold a broad portfolio of companies.

So, a VC firm invests in a business because they think the business idea is good and it will grow so that they will sell their shares and get way more money than they initially invested.

Note: it is one of the few options to consider when the businesses seek funding to reach the next level. Not all investment is coming from VC firms.

2. How do VC firms decide on which companies to invest? Which type of companies receive venture capital funding?

Companies that receive the funding are mostly the ones which have a high growth potential with a promising MVP (Minimum Viable Product), a strong team with a grounded vision and a high level of business understanding. Other than these very general factors, you can imagine VC firms taking the demand, the market and the business metrics of the company they will invest in into consideration.

3. What is the difference between venture capital funding and a bank loan?

The following should sound familiar: The higher the risk the greater the return. It is the reason how VC firms survive and why banks don’t give loans to especially small, unstable businesses.

While most of companies which got an investment from a VC firm wouldn’t be able to get a bank loan, I hardly doubt they would want to get one. This is due to carrying high risks. If something goes wrong and the business goes bankrupt, they will have to pay the bank back somehow. However, they don’t have to pay the investment back in case they have a venture capital investment because of the nature of investment. (As to say it is not a loan, it is an amount VC gives the company in exchange for a certain % equity stakes.)

 4. What benefits do VC firms provide other than money?

Other than money, Venture Capital firms provide insights, mentorship, guidance and networking possibilities. They usually hold a broad portfolio of companies that they invested in which helps them gain experience and insights on different areas.

As mentioned in the previous answer, working with a VC firm is low risk compared to getting a bank loan, it brings its own advantages in this sense as for most of the companies it is hard to survive without investment in early stages.

5. Name a few famous VC firms and the companies they invested in, please.

Accel: Bumble, Slack, Dropbox
Y Combinator: Airbnb, Stripe, Coinbase
Bessemer Venture Partners: Pinterest, Twitch, wix.com

There are lots of other companies that are worth mentioning as well such as Andreessen Horowitz, Sequoia Capital, Benchmark etc. but I wanted to keep the list short. Please go and visit their websites to get more information and see their portfolio.

I know you have been hearing things like pre-seed, seed and series A-B-C and wondering what kind of differences there are among these. I will talk about those in my following posts.

Type your questions and comments in the comments section below!

Take good care and stay healthy & happy.

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