What is a Venture Capitalist
Before we dive into the topic of venture capital, we first need to learn what a venture capitalist is.
A venture capitalist, better know as a VC, is a professional investor that manages a venture fund. This fund is used to invest in startups at an early stage before they have crossed the line of becoming a successful business. In exchange for funds, the VC receives a beforehand negotiated amount of stakes.
One important fact you need to know is that there is not one particular type of venture capital investor but many different types of investors. The main differences among VC investors are the phase they invest in, the amount of funds they are willing to invest, and the investment strategy they follow.
However, all venture capital investors have one thing in common: they invest in startup equity and thus participate in both its economic success and its losses (even up to a total loss).
On the one hand, there is a high risk of failure, but on the other hand, there is an existing chance of having a huge earn-out. These high return opportunities attract a wide variety of VCs, which we will have a closer look at!
Financial venture capital investor
A VC who is acting as a financial investor has the goal to buy and hold the acquired startup equity for 5-7 years. This type of VC will then sell these stakes to receive a considerable return on his investment (ROI). He does not seek a majority stake or want to take over the management of the company but wants to be informed about how healthy the company is, what steps are planned to accelerate future growth and how the company is governed.
Due to the financial investors solely financial interests, the commitment within the company is usually not as extensive as that of a business angel or a strategic investor.
Strategic venture capital investor
As written before, different types of VCs exist. Some of them are only interested in the financial aspects of an investment, however, there are also VCs that are also interested in the strategic aspects of an investment. Their goal is to have a voice when strategic decisions have to be made.
Strategic venture capital investors are mainly companies that try to gain access to a startup's technology or know-how through their investment hoping to find new ways to promote their products or to accelerate their growth. This type of venture capital is called corporate venture capital.
Often huge companies have a highly complex operating structure and can not move as fast as startups do. As a consequence, a growing number of big companies are becoming afraid of being disrupted by fast-moving startups. The easiest way to stop the disruption is to swallow those startups, or how large companies call it: "integrating" these startups. Such an investment offers these startups a lot of opportunities to accelerate their growth and revenue but could also lead to a founder's loss of control of his startup.
Investment Volumes of Venture Capital Investors
When it comes to choosing a venture capital investor, the amount of funds startups need determines which investor they will (have to) choose. Business angels, state venture capital investors, and crowdfunding investments usually provide startups with lower investment volumes, whereas family offices, depending on their size and financial strength, invest medium ticket sizes. Larger financing rounds, on the other hand, can usually only be managed with the help of venture capital or private equity companies.
In conclusion, it can be said that the venture capital market offers a broad variety of different venture capital investors you can choose from. Most importantly, the VC investor and startups have to match each other in concerns of the scope of the investment as well as the strategic orientation and its size.
If you decide to get an investment make sure to have a clear internal structure. Otherwise, conflicts are bound to appear.
The choice of the right venture capital investors has a huge impact on the future of your company. Make sure to have a good gut feeling when deciding to go with a certain investor.