- After you've raised some money and you've gotten your business going, as you raise a little bit more money, you'll often start to encounter venture capital. If you're raising any sizable amount of money, usually over a couple million dollars, you'll typically be targeting venture capitalists, not just for that first financing but ongoing financing through the life of your company, including into very late stage and very large financings. One of the mistakes entrepreneurs make all the time about venture capitalists is they view them as a singular archetype.
So you often hear entrepreneurs talk about VCs and say, VCs, as though all VCs were the same. It's the wrong way to think about it. Think of them as a bunch of characters in Lord of the Rings. What you've got is you've got some wizards and you've got some elves and you've got some orcs, and you've got some dwarves, and you've got some trolls, probably a lot of trolls actually in the venture industry, and these characters are all different, so a VC could be one of these characters with different experience levels and different number of things in their toolkit.
A venture capital firm is usually a collection of some of these characters, so instead of thinking about a venture capital firm as a singular archetype, you're actually dealing with a collection of personalities and experiences and styles all within the context of venture capital firm. The importance of this is to recognize that when you go to raise money from venture capitalists, it's really important to understand what they are like and what they are motivated to invest in. Understand how they work with companies and make sure that their value systems and how they want to approach your business in good times and bad times are going to be consistent with what you are interested in.
Venture capital funds almost always are a combination of institutional capital that the venture capitalist raised, combined with some of their own capital. One of the reasons that they raised additional capital from institutions is to have a larger pool of capital to invest in your company. A venture capitalist has control over all the decision-making around that capital, so when a VC invests in your company, what you're really getting is a long-term partner that typically owns a significant portion of your business. You might often find a venture capitalist owning anywhere from 10 to 30 or 40% of your company.
It's useful to know that VCs generally don't want to control your business, but in a lot of times they exert a lot of control over your business and the direction you go. So understanding, again, what their motivations are and what the characteristics of that individual, as well as the firm is, is critical to knowing whether or not you've got a good VC for your company or not.
- Exploring potential stakeholders: friends, family, and more
- Finding a venture capital firm
- Breaking down the term sheet
- Taking on debt
- Asking for NDAs
- Accepting a no