Breakin into Venture Capital 💸
VCs are an instrument for investors to get high-risk, high-reward return.
Welcome to Rubric's Newsletter
We share a weekly email newsletter talking about some unconventional topics and keynotes that makes a lot of noise on the internet.
Sign up to experience the best-curated content here!!
The minute we start reading business newspapers or newsletters, we see startups all around who are raising hefty amounts from different investment/venture capital firms, angel investors, etc. Various terms like valuation, series rounds (A, B, C ....), equities, IPOs are used while mentioning the investment deals.
But wait!!
Do you know how exactly the process of raising money for a startup works and what these terms are!!
Business v/s Startups
Businesses are not unique. If I am setting up a hair studio, a restaurant, or a hotel somewhere. Okay, I will be self employable, I might earn some profits, but I can not scale the businesses everywhere. People are already doing what I am thinking to start.
But imagine someone coming to my home to dress my hair (Urban clap does that), an online food delivery service (Zomato does that), and a large chain of economical hotels in almost every city (Oyo does that). This sounds interesting and scalable.
Startups are tech innovations that are meant to create something new and unique.
Startups need a massive amount of money to create their customer base, set up the technologies, market their products/services, and create a sustainable team, and borrowing money through loans and other traditional methods requires high collateral assets.
Naah!! not a fair deal. With 92% of the startups shut down in the first three years, traditional loans are deadly.
Venture Capital
If the investor sees high growth potential in your company, the money is yours. Here the investor provides monetary support to startups and small businesses in exchange for private equity in the company.
Before an investment, the company's total valuation is predicted. Things become a little tricky here, we don't have the exact cash flows, beta, or capital structure of a private equity firm, So to calculate the value, We compare the firm with the best comparable public firm (For a public firm, the valuation is evaluated by multiplying its stock price by its outstanding shares).Â
Of that valuation, a venture capitalist adds on. For example, if my company is valued at ₹1 crore rupees, adding ₹10 lakhs will take 10% of my company's equity 💤
A Venture Capitalist looks for:Â
Tech- Is there a strong technology/product behind the company. Â
Team- What the founders have done in the past. Â
Product-market fit- Is the product/service feasible and will have an active demand.Â
You don't want to take over 100% of a $10 million market. When instead if you take 1% of the $1 billion-dollar market, that's a lot better.Â
VCs knows the fact that most of the startups will fail 😞
More than 80% of the money invested by venture capitalists goes into the adolescent phase of a company’s life cycle. In this period of accelerated growth, the financials of both the company which succeed and which do not have almost the same graph.
VCs not only provide money importantly, if they have a respected amount of equity, they also have their say in the company's decision. So as a founder, when you are looking for a VC to partner with, keep in mind that it's a long-term game.
That's all. If you guys want to learn more about Venture Capital
Ciao
Nishchal from Team Rubric