How venture capital works when you starts a new company
Before you raise capital as a cash-strapped early-stage firm, it may seem as though all of your issues would disappear if you only had some money in the bank. At TechCrunch, it frequently feels as though every other startup article is about a new, entertaining business that has raised sacks full of venture cash.
Millions and even billions of dollars are going to startup tech businesses of all sorts, and we are just as guilty as anybody of leaning a little bit toward the “cult of money” side of things as the de facto news hub for the startup ecosystem. One fact is that obtaining funding from a VC company effectively is a significant accomplishment for a business. Another fact is that not all businesses should use venture capital. Raising capital from VCs has major drawbacks, in reality. I’m considering both perspectives in this essay.
I work two regular jobs. The first is as a startup pitch coach, and the second is as a writer here at TechCrunch, where she writes our wildly successful Pitch Deck Teardown series. I was the director of Portfolio at the hardware-focused VC firm Bolt before to taking on these two day jobs. As you can anticipate, this implies that I speak with more startups and have seen more pitch decks than a human being should.
However, a lot of the pitch decks I see make me doubt the creators’ serious consideration of their plans. Yes, having a tonne of money is attractive, but it has a downside and it’s difficult to get off the VC treadmill once you’re on it. It follows that many entrepreneurs probably don’t fully understand how venture financing operates. This is problematic for a variety of reasons. Selling a product to a client you don’t fully comprehend is the last thing a business entrepreneur would ever consider doing. It’s risky not to comprehend the potential investment motivations of your VC partner.
So let’s take a look at how it all hangs together!
You must comprehend the motivations of VCs in order to fully comprehend what occurs when you raise venture money. To put it simply, capital managers might opt to engage in venture capital, a high-risk asset type.
These fund managers are referred to as limited partners, or LPs, when they participate in venture capital funds. They are perched on enormous mounds of money, such as pension funds, university endowments, or vast corporate treasuries. Their task is to see to it that the massive cash collection keeps growing. If it doesn’t, inflation will indicate that the purchasing power of that capital pool is declining. At the lowest end, it must increase in step with inflation. That implies the following: The Company that owns the money is losing money, and the fund manager will likely be fired as a result.
In order to keep up with the present rate of inflation in the United States, the lowest end of the range is “raise the size of the pile by 9% every year.” Typically, fund managers invest in comparatively less risky asset classes to beat inflation; this approach performs better in low-inflation circumstances. This low-risk investment may be split between bonds, banks, and index and tracker funds that follow the stock market. A portion of it may be invested in banks. There will be a modest portion of the pie set aside for “high-risk ventures.” The fund can “afford” to lose money on these assets, but it is hoped that the high-risk/high-reward strategy will result in a double-, triple-, or even higher increase.