Venture Capital 101: Essential Tips for New Investors

The venture capital investment industry is growing daily. However, VC firms face challenges searching for high returns against higher stakes. Even successful venture capital companies sometimes require assistance when investing in new ventures. Given the inherent risks associated with nascent businesses, their potential for success remains uncertain in the early stages.

Although, some venture capital companies have mastered the art of choosing the proper startup. With the right investment strategies, due diligence, and risk management, your venture capital investment can reap huge benefits.

In this blog, we will learn about venture capital in India and understand the essentials of venture investment.

What is Venture Capital Investing?

Venture capitalists invest venture capital funds in a company against a percentage of its assets. They invest money in promising startups that will grow in the future and provide these startups with mentorship and financial support.

The right consulting skills from VC firms ensure the rapid growth of startups. Venture capital investments are not restricted to startups, as existing companies can also receive help from VCs during expansion.

Types of Venture Capital

Funding rounds are classified into three series: Series A, B, and C. Each series represents a funding stage with increasing capital investment. However, businesses must meet specific targets to secure this funding. Let us explore the series in detail.

• Series A

Startups receive seed funding at their business's initial stage, which helps finance market research and product development. Series A funding comes after seed funding. Here, the investors must look for companies with solid strategies to help make a profitable business.

This round fetches approximately $2 to $15 million. The company must develop a plan to make its business profitable in the long run.

• Series B

In series B, businesses prove to the investors that they are prepared for large-scale success. Since this is post-development funding, companies need to focus on their ability to scale the business further.

• Series C

This funding series helps companies make further decisions, such as developing new products, entering new markets, or acquiring new companies. This round usually involves significantly larger investments from venture capitalists and angel investors.

Key Terms Used in the Venture Capital Industry

As an upcoming investor, here are some key terms that are a part of the industry:

• 409A Valuation: This is the third-party valuation of the company’s common stock. Startups use this valuation to determine the exercise price for their stock options.

• Bootstrapping: Bootstrapping is a business strategy that helps startups to self-finance. This eliminates the need for an angel investor.

• Carried Interest: The investor charges this profit percentage against the amount invested. Depending on the funds invested, it can range between 20% and 30%.

• Management Fee: A management fee is a percentage charged on the amount invested by the investor. This percentage is usually between 2% and 3%.

• Due Diligence: A new investor performs a process to test the viability of the investment. This is termed as due diligence. It helps the investor to confirm the information provided by the company is accurate.

Investment Strategies to Follow as a New Investor

To become a successful investor, you need to have a compelling strategy. For that, you must understand the industry's requirements and devise a plan that will help you gain more returns. Let's examine some investment strategies.

• Developing a Plan

Creating a working fund strategy will help pave the way for your future. Consider some questions to help you draft a plan. Here are a few examples:

1. At which stage will you be investing?

2. How much venture capital fund will you be investing in?

3. What will you look for in a company before investing?

4. What makes this strategy likely to succeed?

The answers to these questions will help you develop a strong, decisive strategy for the future.

• Build a Strong Investment Portfolio

Whether you invest alone or through a firm, your past investments showcase your decisions. If your past investments are profitable, you will succeed in getting good pitches in the future—your portfolio talks about your reputation.

• Build a Strong Team

A team with all the management skills necessary for an investor plays an important role. Having a team will help delegate tasks. This will help you focus better on other significant prospects. Having partners who can find good opportunities, analysts who can carry out due diligence, and an operations team to look after various aspects will help greatly.

Essential Tips Every New Investor Must Follow

If you want to invest your money in a venture, these are the essential tips to ensure higher returns.

1. Keep your Resources Ready

As a venture capitalist, you need to analyse your funds before investing. Pooling resources before investing will avoid risks of personal loss. It would be best to act fast to prevent other investors from seeking an investment opportunity. Having the resources ready will help you stay on top of the game.

2. Partner Up with Other VCs

It is important to partner with other VCs to delegate the work. Investors will contribute money and bring different skills to the table. There are two types of partnerships that a venture capitalist can enter.

• Limited Partnership (LP): In this type of partnership, one partner who gets paid by the fund takes unlimited liability. Other partners have a limited liability, provide capital, and pay management fees to the general partner.

• Limited Liability Partnership (LLP): Each partner's liability is limited in this type. This allows multiple investors to have equal control over the business.

3. Due Diligence

Engaging in financial analysis is essential for gaining insights into your financial situation. As a venture capitalist, managing funds is integral to the role. Conducting thorough economic analyses is crucial to guaranteeing success in your investments.

Venture capital analysts help the business with due diligence, assess venture capital investments, and analyse risks. They also help monitor the startup's solvency and liquidity.

4. Keep Up With the Industry

Be mindful of the changes in the industry. As a VC investor, you need to be aware of which businesses have the potential to skyrocket. Expose yourself to new ideas and keep details of the latest trends in the market. Follow beta testing and crowdfunding sites to determine the industry shifts.

5. Prioritise Upskilling

As a venture capitalist, you should allot time to upskill and try to understand every aspect of the industry. This helps the firm to stay in the game for a long time. New investors must be updated with information about industry trends, emerging technology, and best practices.

The Takeaway

Venture capital investment demands investors to stay informed and updated. Conducting thorough due diligence on market trends and financial data enables investors to assess the feasibility of their investments. Additionally, investors need to manage and mitigate the associated risks carefully. Seeking help from experts will allow investors to evaluate the risks before making an investing decision.

Collaborating with GrowthJockey provides an effective solution for successful due diligence and risk assessment. GrowthJockey’s team of experts can assist with strategies to help new investors make informed decisions—team up with GrowthJockey to start investing and ensure success as an investor.

FAQs

1. Should venture capitalists invest in startups?

Most venture capital companies hesitate to invest in startups because of the initial stage. They are still determining if the company will do well in the future.

However, some venture capital firms risk investing in a startup by trusting the product and evaluating the market. They study the company's finances to decide. Investing in a startup is a great idea as early investment fetches higher rewards.

2. What makes a successful venture capital investment?

Investing in a company with the best managing team, large market potential, and a unique product tends to fetch higher returns. A successful venture capital investment depends on how the company will perform. The company you invest in must provide an exceptional product with high market potential.

3. How do venture capital investors earn?

The venture capitalists make money in two ways. One is the management fees. These investors charge a management fee as a percentage of the total funds invested annually.

This can range from 2% to 3%. The other income is from the profit percentage decided while investing. They receive around 20-30% of the profit share each year.

4. Do you need a license to be a venture capitalist?

No, you do not need a license to be a venture capitalist. All you need is a set of skills to predict a business's future and the proper knowledge to understand the terms. You also need resources to fund new companies.

5. Why do startups rely on VC for funds?

Startups might sometimes find it challenging to repay the amount because of the uncertainty of the business. Startups do not have to worry about returning the money to the VCs. They guarantee an equity stake in case the startup succeeds. It is the perfect solution for the new entrants to scale their business.