If you are planning to start a startup and get it up and running, you cannot not know what Venture Capital is. It is, in a nutshell, a form of high-risk investment that is generally geared toward funding innovative startups specifically. Knowing this concise definition, however, is not enough: in order to take full advantage of the potential of this form of investment, in fact, you also need to know how it works and how you can access it.
What is Venture Capital?
As we briefly mentioned in the introduction of this guide, Venture Capital is a particular form of high-risk investment that, in practice, results in investments in the venture capital of companies, especially innovative startups, that have high growth potential.
Venture capital: differences from other types of financing
When we talk about venture capital we are referring to the portion of capital contributed by venture capitalists. What distinguishes them Venture Capital from other financing is precisely the high risk attached to this particular type. Not only that, but in the face of this particularly high risk, another distinguishing feature is the exceptional economic returns that can result in the event of success.
Strategies for attracting venture capital investors
Before you know what are the best strategies for attracting Venture Capital investors, it is important that you know more about the stakeholder you will need to approach.
What does it mean and who is the Venture Capitalist?
People who establish or manage a venture capital fund are called venture capitalists. They typically offer their funding to companies that are in the early stage of their development and have an innovative and scalable business model. Funding takes the form of offering capital in exchange for a stake in the company (they generally take an ownership stake of less than 50 percent).
While Venture Capitalists are aware that many of the startups they invest in may fail, they are willing to take this risk because they expect significant returns. Long story short, startups that succeed also pay back their investments in failed companies. Keep in mind, in this regard, the words of Marc Andreessen:
“In a great market, a bad company will die, a mediocre company will flourish, and a great company will become extraordinary.”
Some Venture Capitalists do not just support startups financially; in fact, figures of this type can also offer companies some additional services, such as consulting, strategic support, and networking, with the aim of helping them grow and achieve their goals.
Now that you know who the Venture Capitalists are, you can study the best way to attract them. The main tools are essentially two: Pitch Deck or Business Plan and Value Proposition.
Prepare a convincing business plan
Preparing a persuasive Pitch Deck or a persuasive Business Plan depending on the stage the startup is in, is the first step in attracting Venture Capitalists. These strategic documents, which summarize the company’s operational and financial goals, can be of great help to you when you need to present yourself to investors because they allow you to formulate (and then implement) the best execution for your business idea. Not only that, drawing up detailed plans and budgets also allows you to follow a well-defined guide on the journey to success, keeping your focus high on strategic short- and long-term goals.
Building a solid value proposition
Another key step is building a solid value proposition. The Value Proposition is a statement that, in a few words, summarizes and communicates why your products or services are better than those of your competitors. Be careful: it is not merely a description of the product or service; it is what highlights the specific solution your startup can offer and the promise of value it can deliver.
What is the difference between Business Angel and Venture Capitalist?
There is often a tendency to confuse Venture Capital and Business Angel: the main difference between these two types of financing lies in the origin of the funds invested. While Business Angels invest their own money in startups, Venture Capital funds, at the time of their establishment, must themselves raise capital. To do so, they generally turn to institutional funds, such as banks, foundations, public agencies etc.
How to Start a Startup with Venture Capital
The time has come to understand in practical terms how to start a startup with Venture Capital. Now that you know what the main tools are for attracting Venture Capitalists, you also need to know how to attract them effectively. To be more clear, you need to know what are the requirements of startups that capture the interest of this particular type of financiers.
You may be surprised to know that venture capitalists are generally relatively interested in the business idea: what attracts their attention most is the aforementioned execution and, that is, the team’s ability to carry it out successfully. Regarding the business idea per se, however, there are four characteristics that make the difference: scalability, broad market (vertically or horizontally), the defensibility of the idea itself (crucial in science or engineering), and its impact (i.e., the ability to generate positive change in a lasting way).
Phases of investment
Venture capitalists’ focus on the individual requirements of startups also depends on the stages of investment they are in. For example, the capabilities of the team behind the startup are more relevant in the very early funding rounds.
Seed Round
The Seed Round represents the first round of financing for venture capital investments. What occurs here is that venture capitalists provide small amounts of capital to help a new company develop its business plan, create their so-called Minimum Viable Product, and validate business model and market.
Early Stage
Through so-called Early Stage funding, startups can move beyond the first stage of growth. In this case, compared to Seed Round funding, the capital provided by Venture Capitalists is larger, since startups are already in an expansion stage. At this stage, funds focus on Product-Market Fit, talent recruitment, and customer acquisition.
Late Stage
Late Stage funding in Venture Capital, on the other hand, is triggered when startups are already generating revenue and growing at a fast pace. At this stage, the focus is on Business Model Fit and growth.
Benefits and risks of using venture capital
Analyzing the advantages and disadvantages of a business decision is always wise. So, here we are with the list of benefits and risks of using Venture Capital.
Of the risks of Venture Capital investors we have already mentioned: this particular type of financing is high-risk (because it is aimed at companies that, in many other cases would not receive financing) but it is capable of generating incredibly high returns.
If you are contemplating Venture Capital for your startup, however, you need to make other assessments as well: one aspect in particular that you need to consider is that Venture Capitalists are willing to put even large amounts of capital on the table in exchange, however, for a stake in the company. This, of course, places limits on decision-making power because the investor participates in the management of the company.
Differences between Venture Capital and Private Equity
There is one more aspect to clarify when it comes to Venture Capital and that is the difference with Private Equity.
Venture Capital is considered a form of Private Equity, but there is a key distinction: in Venture Capital, entrepreneurial ventures and startups are financed, while private equity tends to invest in companies that are already somewhat established.
The stake also varies between Venture Capital and Private Equity: in the former case, it is generally less than 50 percent of the company’s capital, while in the case of Private Equity the investor takes a majority stake.
List of Italian Venture Capital Funds
To make this guide dedicated to Venture Capital truly complete, we cannot fail to list some of the most important Italian funds. As reported by Forbes in reference to the year 2023, the top 5 Italian Venture Capital companies include Innogest, P101, United Ventures, LVenture Group and Italian Angel for Growth.
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