HOW VENTURE CAPITAL FIRMS WORK

Not all VC firms are alike! Some are raising their 10th fund with billions under management while others are investing out of their first fund with $5-10m under Mgmt. Some focus on early stage companies, while others focus on growth or later stage companies. However, they all do have one thing in common: They are using other people’ s money to take a risk in an attempt to generate high returns. Their #1 priority is returning money to their investors, not helping you. Here is how they work:

1. They are NOT that flexible: check size, industries, stage, diligence process, credit/background checks, hold period etc has to fit into the mandate they agreed to adhere to with their investors. They are legally bound to this. Find out by checking their website. Most people get rejected because they don’t fit the fund strategy.

2. There is an ENORMOUS difference between top 20 VC firms and everyone else. Top 20 guys “make” unicorns. Others have way less cash, resources, time, people, relationships and reputation to offer companies. For example, Insight Venture Partners has like 100 people in their NYC office, 50 of them are there to help companies after the fund invests! Same for Andreessen, Sequoia, Kleiner, etc. Small funds cut 25k-250k checks. Larger firms cut $250k-100m checks.

3. VC firm economics sometimes don’t align with founders. VCs will, at times, aggressively try to block a deal that doesn’t meet their criteria for a successful exit. An opportunity for a significant return to founders and employees might not be attractive enough for venture investors, and VCs are usually able to block exits through the terms of their preferred shares or by dominating the boards of the companies they invest in. You have to watch out for this in term sheets. The reason is funding need to show success in order to raise their next fund. That usually means showing progress on investments that have not been realized. The venture fund may want to raise around at higher valuation than is warranted and include terms that are unattractive to the entrepreneur. This way their current fund looks more attractive and helps them to raise their next fund.

Any QUESTIONS ABOUT HOW VC funds work? ASK!

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