Arif Efendi is an entrepreneur and business leader with extensive experience and knowledge of a wide range of different industries, including the hospitality and technology sectors. This article will look at venture capitalism, providing an overview of the key benefits of securing investment from a venture capital firm from the start-up founder’s perspective.
Venture capital (VC) is a type of private equity funding that allows early-stage, high-potential companies to access the funding they need to operate and scale in return for an equity stake in the company. Access to financing is incredibly important to start-ups, enabling them to grow and contributing to their success. Venture capital is a key component in the entrepreneurial landscape, providing a much-needed injection of capital into businesses to boost success and improve their growth trajectory.
George Doriot is renowned as the ‘Father of Venture Capital’. In 1946 he launched the American Research and Development Corporation, raising a $3.58 million investment fund for companies commercialising technologies developed during the Second World War. His company’s first investment was on a start-up developing cancer treatments by leveraging X-ray technology. Doriot’s initial $200,000 investment returned an impressive $1.6 million profit in 1955 when the company went public and he exited it.
Across America’s West Coast in the early 1990s, venture capital investment fuelled colossal growth, particularly in Silicon Valley. By 1992, West Coast companies were attracting 48% of US investment dollars, with Northeast Coast industries accounting for just 20% of investment.
There are three main types of venture capital funding:
- Pre-seed funding, which occurs in the earliest stages of business development when the founders are trying to translate a promising business idea into a concrete business plan
- Seed funding, which happens when the business is seeking to launch its first product but as yet lacks viable revenue streams
- Early-stage funding, which occurs once the business has developed a product but needs additional funding to ramp up production and sales and become self-sufficient
In order to develop and grow, a start-up business requires substantial collateral. Venture capital firms offer much-needed resources, enabling early-stage businesses to invest in infrastructure, research and development, and marketing and hire top talent. Businesses seeking VC investment must submit a business plan to a venture capital firm or angel investor who will then perform due diligence, thoroughly investigating the company’s products, business model and management.
The availability of venture capital funds allows start-ups to achieve milestones that otherwise may have been out of their reach. Although financing is the most significate benefit of venture capital investment from the founder’s perspective, securing the backing of a venture capital firm also offers several other attractive benefits.
Where an established venture capital firm places their weight behind an early-stage business, they send out a strong message to third parties such as customers, partners and other potential investors, validating the start-up’s potential. Securing venture capital investment can, in turn, make it easier for a business to secure the trust of other stakeholders and attract additional funding, lending the company a competitive edge in its market by enhancing its reputation.
Another key attraction of venture capital investment is that it helps founders to access additional industry-specific knowledge and experience by widening their professional networks. With the VC’s guidance and mentorship, founders can confidently navigate challenges and make strategic decisions while avoiding common pitfalls. By helping them to increase their contacts and networks, VCs enable founders to strategically harness these connections to access critical resources, establish partnerships and access new customers. Introductions made by VCs can play a key role in driving business growth, opening up avenues to a broader range of potential collaborators and stakeholders.
