When a company startup is just starting out, they rely on the investments of others in order to ensure the business’s goals and ideally operational success. Investors who believe in these startups invest venture capital into startups they believe will turn a profit. Unlike other forms of investing, venture capital investors take a high level of monetary risk by backing a company that may fail within the first year. Because there is such a high risk, there are often high-interest rates associated or percentages with the deal, as there is a strong possibility that the startup with produce respectable amounts of capital gains over time.
The Cycle of Financing Startups
Typically, the first form of funding a startup seeks is seed funding from angel investors. Angel investors are firms or individuals who put money in the idea of the company with the expectation that the business will take off and survive the valley of death. The valley of death plagues many early startups and refers to the time when startups are trying to manage their negative equity prior to earning revenue from actual customers.
The main difference between angel investors and venture capital investors is the amount funded and the stage in which they back the business. Angel investors are typically the ones putting down the seed capital and are financing more in an idea than an actual product, while a venture capital firm finances higher levels of capital and are seeking to take the business to the next level. By the time a venture capital investor invests in the business, it has typically already gone through the valley of death and survived.
Pitching to a Venture Capital Firm
Startups who want to receive seed funding from angel investors or long-term venture capital must show that the business itself has a strong potential for growth. Startups with incredibly high development costs are less likely to appeal to these types of investors because it’s much more expensive to get passed the valley of death before earning substantial revenue. The most appealing products for venture capital investors are ones that are innovative and have proven to be a need in the market.
In a venture capital deal, the investor is the one with the majority of power. For startup entrepreneurs that are considering pitching to a venture capital investor, understanding that they will hold a lot of power over the business’s practices that the owners would otherwise hold. While there’s a good chance the idea or service a startup would never get off of the ground successfully without a knowledgeable venture capital investor, entrepreneurs that want to maintain firm control of their business should consider seeking other alternative funding sources.