Venture capital can also help startups at an operational level
To be attractive for a venture capitalist, a startup must guarantee a certain life cycle and must operate in a rapidly growing sector
For a startup entrepreneur, who intends to introduce his innovative idea to the market, the most challenging step is referable to the “search” for funding sources.
One possibility offered to startups is using venture capital funds, whose role is directly related to innovation, the main “social object” of companies that bet on their idea and the product that will be born from the idea itself.
It should be remembered that “venture capital” is a high-risk form of investment, which, however, in some cases could prove to be highly remunerative; the high risk is directly attributable to the fact that investments in startups often entail a loss resulting from the fact that this type of business has a high failure rate.
The investor assumes operational risk (uncertainty about whether the business will succeed in finding a market for its product) and financial risk (lack of certainty of investment recovery).
The characteristics that a startup must have to attract investments
For a startup to be attractive to a venture capitalist, it must guarantee a specific life cycle and operate in a high-growth sector in the near term.
Other aspects that attract investment are:
1) the composition of the team;
2) the “scalability.”
3) the market (the breadth of which can be measured vertically [broad, rich or specific] or horizontally [geographically]);
4) the defensibility of the idea;
5) the impact, i.e., the assurance of generating positive and lasting change.
How does a venture capital act?
Venture capital acts according to its business plan; upon reaching the raising goal, it begins to operate within the boundaries of its “focus” (sectors of interest and/or the life of the company) as long as the product offers a competitive advantage.
By acquiring company shares, venture capital can also help startups at the operational level by providing expertise in both managerial, technical, and relational areas; for this reason, it often requires the presence of its representatives on the company’s board.
Venture capital figures
There are two figures of venture capital:
(a) the “limited partner,”; the institutional investors who finance the project;
(b) the “general partner”: individuals who manage the fund.
Characteristics of venture capital are an investment in the “early stage” area (set of financing to support innovative companies with high growth potential in the early life cycle) and investment to secure financial resources for existing companies that need capital to consolidate and/or accelerate growth and move toward “exit” or IPO.
Investment sectors and venture capital structures
Venture capital firms usually invest in sectors: deep tech, blockchain, new materials, space, medical, eco – industries, development in agriculture, agribusiness, mobility, and structures dealing with “social” cryptocurrency.
It should be noted that venture capital companies are usually structured as “partnerships”; the general partners are equated with the company’s managers and have the power of funds by meeting in committees to select “target” companies.
On the other hand, investor partners who assign the right of management qualify as limited partners.
As in partnerships, general partners have unlimited liability, while limited partners are liable only for the value of their investment.
The life of a venture capital fund is fixed at ten years; in the first 3 to 5 years, the investment cycle must be completed; the point at which the 10-year life begins is when the money raising is closed.
