The Venture Capitalist

Over the weekend I met with some VC’s from Silicon Valley and Switzerland, which prompted me to take a crash course in the world of venture capitalists and startups.

What is Venture Capital?

There are two types of financing: debt and equity. Debt financing means: I’ll give you this money, if you promise to pay it back to me with interest. Equity financing means: I’ll give you this money in exchange for owning part of your company. Venture capital (VC) is financial capital provided to early-stage, high-potential, companies in exchange for equity in the companies it invests in.

What is the structure of a venture capital firm?

A VC firm is comprised of limited partners (LP’s) and general partners(GP’s). Limited partners (pension funds, educational endowments, foundations, insurance companies, wealthy people) are investors in the venture capital firm’s fund. General partners (ex-CEO’s and founders) are are the ones who run the fund, source deals, make investment decisions, and maintain the portfolio. Fun Fact: 99% of the fund comes from LP’s while 1% comes from the GP’s.

Industry norm is that 20% of deal profit goes to GPs while LPs get the remaining 80%. Additionally, 2% of the fund size goes toward fund expenses, such as paying the salaries of the GPs and any additional staff (associates, analysts, etc). That means, if you have a $100M fund, $2M of that money automatically goes to the GPs who decide how to use it.

What are the different sources of capital?

Angels: A wealthy individual who invests their own money, usually in a business in which they have expertise. These are ex-founders and wealthy people.

Super Angels: An angel who is the lead investor of a group of angels (syndicates).

Micro Seed Funds/Accelerators: Small funds that do a lot of small investments in exchange for a small amount of equity. Accelerators tend to sell themselves as providing additional support such as mentorship, business connections, and a range of professional services (such as help on the legal part of your company). Examples of these are Y-CombinatorKima VenturesTechstars, etc.

Venture Capital: Medium funds that invest greater amounts of capital for greater amounts of equity. Examples of these are Andreeseen HorowitzSequoia CapitalGoogle Ventures, etc.

Growth Equity: Big funds that invest huge amounts of money to expand a successful business model. One example is Summit Partners.

What are the different types of rounds?

  1. Seed: Initial funding to build initial product and prove business model
  2. Series A: Build core team and launch core product
  3. Series B: Expand team and expand product portfolio
  4. Series C: Scaling the business model
  5. Series D+: Geographic expansion of business

If you are wondering what round a company is in or are curious about its funding history, take a peek on

How does venture capital work?

  1. Entrepreneur gets introduction to multiple VC firms
  2. Entrepreneur pitches business to VC firms
  3. Term sheet written if VCs want to invest
  4. Build business further
  5. VCs repaid through: acquisition, IPO, or bankruptcy