There are several different types of VC investments. Some will be profitable and others won’t. But one thing is certain – VCs can differentiate themselves from the other kind. The most successful VCs will be able to identify the difference. Often, the difference is in their ability to follow-on. That means pouring more money into a company after it has failed. Another way to tell if you are a good VC is to follow-up on a previous investment.
VCs typically invest in high growth industries because they are more competitive. But they may also be reluctant to invest in low growth industries because their competitors are more likely to have good ideas. The challenge is finding the right balance between LP interests and the needs of the customer. In other words, balancing the relationship between LPs and entrepreneurs is difficult. Excessive founder friendliness and aggressive term sheets can damage long-term cap table health.
Generally, the first round of funding is for marketing and product development. As a result, only a small number of VCs will invest in this stage. Later investment rounds will be known as Series B or Series C. A second round of investment is working capital, and is appropriate for companies that aren’t yet profitable. An expansion round, also known as mezzanine financing, is often required when a company reaches a certain size and is ready to expand.
Fundraising for VCs typically lasts for months or years. During this time, a VC firm seeks new LPs for a new fund. Once the amount is raised, VC funds close to new investors. The next step is investment, and most VC funds have an investment window of one to three years. Then they make investments based on a particular thesis, typically between one and three years. It is important to understand this before you start investing – a venture capital fund will not invest in a company without a plan.
VCs generally invest in a company’s balance sheet and infrastructure until the company reaches a certain size and credibility. The venture capitalist will monitor the company and provide additional funding for future rounds. Eventually, the venture capitalist will exit their investment through an IPO or acquisition, and the funds will become profitable. But one of the downsides to venture capital is that it’s difficult to sell a company if the IPO market is weak, so the VC will likely select another exit method or wait for the market to improve.
While VCs are primarily concerned with the long-term success of the companies they invest in, the long-term health of society is a key factor in their decision. The ideal candidate for VC funding will have a proven track record, an IPO, and a good reputation. The VC will want to invest in proven and successful individuals who are already successful. Before investing, it’s important to understand who will be on the board of directors.