This will not clarify all your doubts about Venture Capital (VC), but it’s a good start. If you’re looking for investment, take a look at these Frequently Asked Questions we compiled and asked Portugal Ventures to help answer.
About Venture Capital and investment
Venture Capital is equity financing provided by professional and institutional investors that manage an investment fund constituted by third party’s funding/money (aka Limited Partners).
Venture Capitalists have a significant amount of money to invest (with the sole purpose to invest and have return on such investment) and that is one of the reasons why venture capital is so relevant in businesses in the early and expansion stage, that requires a substantial round of investment and where the potential for profit and higher returns is bigger. Even though some people tend to distinguish seed stage investors from venture capital, as a matter of fact, most seed capital firms are venture capitalists specialized in the seed stage ventures.
The customer. They don’t charge you equity dilution and seal the deal with an invoice/receipt.
Business Angels (BAs) are also qualified investors. They help you create routines and discipline and to understand the processes and nomenclature associated with investment. And if the BA has experience in the market you are in, he can give you access to his network, help you improve your business model and understand better how to reach the customer. The same can be said relating to the VC, in a different perspective.
The big differences: the BA makes a decision on his own money, while the VC has a structure and decision levels to respect. Second, by definition, the VC invests more money, as it has a more significant level of assets under management.
Depending on your evolution stage, you must consider one, other or both.
Usually you build the structure, bootstrap, get your first customers, get a BA that knows the market and reach for a VC when you want to expand the structure after proving your concept.
Before getting invested by a BA, it’s important to understand who he/she is and guarantee the partnership is strategic to your business. If the BA invests a small amount for a high equity stake, he/she must offer a lot more than money because you’ll lose negotiation power in the following investment rounds (and will lose control of your venture). If you know that investment is not going to be enough to reach your first goals, you might consider talking directly (or also) with a VC.
The more investment rounds you have, the more difficult it is to negotiate and to manage your stakeholders.
It depends on the investment conditions. Sometimes, the client becomes an investor to control your business as a marketing strategy and to control your further moves. On the other hand, it might be interesting to have a partner of your industry to help you get credibility to go to the market. It must be addressed in a case by case assessment, but both BA and VC that have relationships with big corporations (the typical big customer), can share their past experience and help you in such assessment.
Some say yes and you typically do if is not such a big round. However, the ecosystem is still maturing and there’s the need to reinforce the dynamic. Most Portuguese startups get Series B outside the country as they want to speed up their global growth. Besides getting the money to grow, the support of VCs abroad helps the expansion of the network in the foreign market. Even though, there are some Portuguese VCs with a significant international outreach and very good local relationships with international investors.
About the team
It depends significantly on your business and your stage. However, there are some patterns the VCs are aware too. When the team looks too heavy in terms of structure and assets, with the positions too defined, something must not be working: resources are being wasted, the company is being structured from the top to the bottom or there may be some pretension. Creating a business with a super structure takes the agility away from a company that’s supposed to be super agile.
The C level may not yet be defined, but the team must show how it is supposed to evolve as the company grows. Do not forget, the team is of outmost importance for a VC.
Hard to tell, depends on the business and the stage.
Only when the business grows to a point where it’s hard to have control of the financial part of it. At first, you’re supposed to control the numbers having an accountant helping you keep your fiscal situation and treasury under control.
But as the business evolves, the team must also be upgraded.
You are a startup; you’re not supposed to define your C level yet.
The C level person is seen as someone with the knowledge to lead and the characteristics to coordinate a team. If you’re only 2 people, are you coordinating each other? Think about establishing the C level when you have teams to manage inside your company. Nonetheless, you need to have that growth thought thorough when you reach out for a VC, including the profile of independent board members.
Miscellaneous of concerns
See if you fit: a startup is a project kicking of that normally has a technology. It’s usually building its first business model or trying to find one with a global ambition. It must be structured, but agile.
The goal of a VC or a BA is not to be involved in your daily decisions. They want to help the growth, working close to the team, getting involved only when big strategic decisions are made.
During the investment analysis, investor and startup can understand how to work together. The decision conditions must be established during the negotiations. If the company doesn’t succeed, the investors will not be successful, so all interests are aligned.
Investors don’t sign NDAs anymore.
Your technology is not the VC’s business; they are in the investment industry.
The VC business lives on their credibility and they don’t want to spoil that. The moment they start sharing confidential content, they will be out of business. If you still fear losing the confidentiality, talk to someone that was invested by that VC before. On top of that, if you cannot use the technology to create a business, the VC will not be interested in doing the deal. Never, ever “sell” the value of the technology rather that the value of the problem you can solve with such technology.
No, it only means your vision is different from the investor’s. Investors also fail a lot (you can also benefit from the learning of their failure, if invested by them.
Not after you close the investment deal: Party only after you have an exit. When you receive the investment, it’s only time to keep working, even harder, as now you have someone else on board that believes you!
Thanks Portugal Ventures for the collaboration.