Startups and Venture Capital investors are often completely misunderstood terms in terms of how they two compliment each other. In this blog post we try to explain how Venture capital investors timeline in terms of startup investment works and what should startups keep in mind overall from an awareness perspective while approaching investors.
Quick summary of how venture capital (VC) firms timeline works and how that can affect fundraising prospects.
A venture capital (VC) firm raises money from others (HNIs / family offices / pension funds etc) to deploy that money in startups so the money can be returned with higher multiples in a typical span of around 10 years time.
VCs are thus fund managers using others money promising them much higher returns than other financial instruments. VCs get a management fee per year and success fee, as commission from successful exits where startups brought massive returns.
VCs hence have to b very selective to invest only in those startups where they expect returns ranging from 10x to 100x. Since most startups fail, the expectation is only one or two startups will grow so big they will cover up losses off all others some of which didn't return any, while some returned a bit or did break even.
Hence it matters that VCs (called General Partners GPs) show performance in returns to their funders (called Limited Partners LPs), so they themselves get higher fees, and when a VC firm raises funds from LPs, they will start deploying that money per year, so depending on which year your startup approaches the fund for funding, VC funds own timeline becomes critical to have found successes in earlier startups, to meet their own deadlines of funds existence for say 10 years.
Small VCs can exit by selling their stake in high growth startup as the startup raises new funds from bigger VCs, and the bigger VCs buys smaller VCs shares giving smaller VC an exit. Or startup could get acquired giving returns to VCs. Bigger VCs have bigger funds with bigger timelines and could wait for many years for returns compared to smaller VCs.
So its critical when a startup approaches VC firms they have an understanding of the size of fund / timeline / other investments so far/ exits / time left for fund because it all decides the pressure VCs will put on you and other factors. Once VCs have finished their commitment for one fund, they will go to raise next fund provided they performed great in previous fund for their LPs, else no one will give them new funds to deploy again.
Angel investors come before VCs in fundraising timeline and are individuals who invest their personal money and they also get exit in similar manner with new fundraising rounds as new investors join and buy previous investors stake.
Raising VC money hence should never be an ultimate goal for entrepreneurs, as the dynamics of investors money has many factors.
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