Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.
VCs will invest across various stages of a startup's lifecycle. Most funds will be included in their thesis, along with industry verticals and location.
Pre-Seed: At this stage, the product is typically in the pre-launch phase, and funding is generally put toward early hirers, market research, and building the initial MVP. The round size can range anywhere from $100,000 to $5M at the pre-seed stage.
Seed: At this stage, funding is put toward improving the initial product and developing a go-to-market strategy. The average seed stage round size has gradually increased over the years. From 2021 to 2023, the average check size ranged from $3-$3.6M.
Series A: At this stage, the company is valued and priced as it's advancing into later-stage funding. Funds are typically put toward growing revenue and building out the team's operations. An average round size in 2023 for Series A was $18.7M.
Growth Stage (Series B, C, D etc.): At these later stages, the company has proven its business model and is looking to accelerate growth. Funding size can go into the hundreds of millions and be used toward acquiring competitors and entering new markets.
The Lifecycle of a Startup Investment
The role you play in a startup's investment lifecycle will largely depend on the fund and seniority level of your role. Regardless, the path remains the same from deal sourcing to post-exit. Let's break it down.
Deal sourcing is the origination of investment opportunities. Deal sourcing can be conducted in a number of ways. Generally, through networking events, warm intros via a VC’s internal network, AI and software tools, or through scouts whose main job is to build quality deal flow for the fund.
Deal screening involves evaluating the sourced deals to see which ones initially fit the fund's thesis. A lead, typically an associate, will collect information on the deal and run an initial analysis to determining the most promising sourced deals
Partner review is when the partners of the VC fund are presented with the screened deals. This is notoriously the most narrow part of the process, with only 10-15% of the deals making it through to the next stage.
Due diligence can take up to 10 weeks as the fund analyzes multiple areas of the potential investment. Financial and legal data, in addition to the competitive landscape, customers, and quality of the product or service is reviewed.
Once the data is collected and analyzed, an investment committee will ultimately decide on whether or not to invest. This committee would consist of the firm's partners but will also include industry experts or anyone to bring further knowledge on the industry.
If the investment committee decides to follow through with an investment, then they will develop a term sheet specifying how much is being invested and under what conditions. A negotiation period will ensue until both parties have agreed on the details of the investment.
Once negotiations have been made, the next phase is closing the deal. This process is said to take 4 to 8 weeks typically, and it's in the startup's best interest to close quickly so they can put the money toward building.
Once investments have been deployed and the startups are off to work, VCs have to manage their portfolio. This involves both qualitative and quantitative data on how their portfolio is performing. Data consists of market research, exit strategies, and KPIs, to name a few.
Besides these touch points, VCs want to see their portfolio succeed and will in turn provide value add to their portfolio. The specifics often depend on the fund since they will likely be experts in a few areas that will benefit their investments. Value add could include hiring support, future fundraising assistance, or general performance support.
Follow-on investments refer to additional funds obtained after the initial investment is made. These investment types further support the company's growth and will come from the existing investors as the startup hits certain milestones. Follow-on can come in the form of debt or equity which will in turn cause shifts in the initial structure of capital and ownership.
If a portfolio company exits, they can be acquired by another company for cash or publicly traded stock that can be liquidated. Another option is that they go public with an IPO (initial public offering) and now have publicly traded stock instead of privately illiquid stock.
Once an exit is made, ideally at profit, VCs can now return their investment back to LPs and be compensated from their carried interest and management fees. Most venture capital (VC) firms typically collect around 20% of the profits generated by the private equity fund, with the remaining portion going to their limited partners. In addition, general partners may also charge an additional 2% fee.
Types of VC Funds
Not all VC funds are made equal and so to pursue a career as a VC it's important to generate a thesis statement for yourself. That way you can see how your own interests and expertise align with the funds focus and structure. This in turn allows you to point out the gaps you can fill for the fund during the hiring process.
Let’s take a look at the different types of VC Funds and how they’re structured:
Staged Focused VCs. Stage focused funds are exactly what you would expect. These are VC funds that invest solely in certain stages of a startups lifecycle. This could be industry agnostic or also be paired with sector specific investments. Stage will range from pre-seed, seed to Series A to growth stages within Series B onward.
Sector specific funds will invest solely in certain sectors such as SaaS, climate-tech or healthtech. These are attractive for startups since this often coincides with more industry specific value add. It also is great for applicants with alternative backgrounds who fit into the funds niche for example for those with academic backgrounds in STEM fields.
Geography specific funds invest in dedicated regions of the world such as LatAm or European markets. Unsurprisingly, these funds will want its team to be integrated into the region's network and actively a part of the area's tech scene.
An evergreen fund is an open-ended fund in which there is no end date or fixed capital benchmark. The distinguishing feature of this fund type is that once a portfolio company exits the capital is permitted to be reinvested into another investment opportunity as opposed to being distributed out to investors.
A fund of funds is a pooled investment fund that invests in other funds. Unlike a venture capital fund where the portfolio is made up of other companies, a FOF’s portfolio consists of other funds and their underlying portfolio. The fund manager could invest in hedge funds, mutual, private equity, real estate, or venture capital funds.
Corporate VC funds are when corporate funds are invested into external startup companies. For example, Google Ventures and Intel Capital are venture arms of tech giants. This allows them to access innovative young companies that may have the potential to become competitors in the future. In return, CVC’s may offer additional strategic support in different areas of the company's growth.
Major Players in The VC Ecosystem
The VC world wouldn’t continue to turn without each of these major players doing their part. Pursuing a job in VC means understanding all the moving parts that make up the industry.
Limited Partners (LP) are where it all starts, they are the ones that supply capital to the VC fund allowing them to deploy capital into startups. LPs can be legal entities or individuals. Limited partners are institutional investors such as pension funds, insurance companies, family offices, college endowment, mutual or hedge funds just to name a few.
General Partners (GP) can either be managing or non-managing partners within the VC fund. Managing partners are often the founders of the fund and responsible for raising capital for the fund, investment decisions and control management company. Non-managing partners are still senior leaders but not involved in management of the company.
Angel Investors are individuals with a high net-worth who provide initial funding to startups in exchange for equity in the company. Check sizes of an angel investor can greatly vary and may be a one-time investment or over a period of time.
Syndicates are led by angel investors or high net worth individuals. Funds are raised to invest in a single company with syndicates meaning they work on a deal by deal basis. LPs invest in a syndicate and the syndicate invests in a company.
Accelerators & Incubators are a great way for startups to receive funding and additional value add for their company. Incubators, on the other hand, engage startups at earlier stages and assist with refining the idea, building a team, and launching. Accelerators take on startups with a prototype or MVP and sometimes the first revenue – they boost them within 3-6 months and help attract investments.
Venture studios generates and tests ideas, invests money, allocates resources and the studio team among various projects, and attracts co-founder entrepreneurs to create startups. Venture studios are raising external funds to invest and support start-ups.
