Do you believe in angels? If you are a startup owner, you’d better do – in angel investors. Who these mysterious people are, and how the mechanism of venture capital works as a whole please read further in this article.
At the same time, if your interest is to attract venture capital or to know specific details on venture capital creation process, IQ Decision UK lawyers will be happy to provide you with a comprehensive legal advice in the field of venture financing.
The basics of venture capital
Venture capital is one of the types of financial capital that investors provide to companies. Usually this happens at an early stage of development, and the company has an important technological component – promising, but the risk of failure is also high. It is not known whether the technology will be successful, or whether the product will become popular in the market. Nobody knows the future. Here, an important role plays the belief, a sheer belief that the new business has long-term perspectives and will be paid off in a form of the above average returns.
Venture capital is most often attracted to startups. Such companies have no history or collateral for a loan, so venture is becoming one of the few options for raising funds. Alternatives are crowdfunding and ICO.
Crowdfunding is often used for hardware products, ICOs – for financing startups, which are primarily based on blockchain. And these scenarios also have their risks, and these risks are enormous.
In return for investments, the venture investor receives an equity in the financed company, and this can be one of the downsides of the deal, since the investor will become the decision maker in the company.
However, most often, his goal is different. The investor's goal is to leave the company by selling his share and at the same time making a significant profit. An ideal option for an investor is the company's IPO, but it is difficult. Another way is to sell your share to another investor at a price much higher than the initial investment, or sell to a strategic investor.
Venture capital is illiquid, and such investments are always very risky. The return on investment will have to wait 3-5 years, sometimes longer. However, with the successful selection of companies for financing, the income will be significant, which is why investors invest in such high-risk assets.
By the way, if you seek legal consultation on launching a startup on kickstarter, look no further! Our profile lawyers will consult you on this matter, as well as how to bring a company to IPO.
Attracting venture capital: express yourself to ‘angels’
The first step for any company seeking to attract venture capital will be to draw up a detailed business plan and submit it for consideration either to the venture fund or to the ‘angel investor’.
Also, for these purposes, you will need the so called pitch deck presentation at hand. This one is a short variant of your business plan usually prepared in a format of a colorful presentation so that it can be shown to potential investor any time and any place, on a business forum, a networking party, or even in a lift.
If a potential investor is interested in the offer, he will have to conduct a comprehensive audit of the enterprise, carefully study the business model of the company, its products, management system and operating history. Such a comprehensive review is very important, as professionals in the field of venture capital and venture capital investment tend to invest large amounts in a small number of enterprises, so as not to disperse and not lose control over their investments.
Moreover, usually the specialists of venture capital funds in the past either were experienced specialists in the field in which they invest financial resources, or have deep practical and theoretical knowledge in the invested area. For example, a venture investor specializing in healthcare could well have experience working as a medical specialist.
After completing a comprehensive legal and financial audit of a company, a venture fund or private investor agrees to invest in the company in exchange for shares of that company. Financing can be carried out simultaneously, but, as a rule, venture financing consists of several stages, so that the investor can assess the effectiveness of the use of invested funds.
How the venture fund works: look from inside
Most venture capital funds are created in the form of a limited partnership. The fund has a general (managing) partner and limited partners – investors who invested their funds directly in the fund.
The general partner establishes a VC firm and subsequently manages the entire operations of the fund (as a managing partner). He personally decides on which projects to invest in, organizes the investment itself and withdraws from it. But limited partners – passive investors – do not participate in such decisions, but can influence the general partner through participation in the supervisory board.
Should you need legal advice for the life of a venture company, or legal support in setup of a venture fund, IQ Decision UK lawyers can provide you with substantial consultancy on these matters, as well as consultancy on making the right choice of a country to establish a venture capital fund.