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How Venture Capital Works

hbr.org

From a venture capitalist’s point of view, the ideal entrepreneur:

  • delivers sales or technical advances such as FDA approval with reasonable probability,
  • tells a compelling story and is presentable to outside investors,
  • recognizes the need for speed to an IPO for liquid...

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Venture capital plays only a minor role in funding basic innovation. In 1997, VCs only invested 6%, or $600 million, went to startups. Around $1 billion of the total venture-capital pool went to R&D.

The majority of VC capital went to follow-on funding for projects originally developed thro...

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VC funds have investors in large institutions like pension funds, insurance companies and financial giants. They place only a small fraction of their funds into startups and high-risk investments.

More than good people or good ideas, VCs look for good industries to invest in.

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The initial period in a company’s life cycle in a profitable industry is a time of accelerated growth, except for the concept stocks that are experimental and require a lot of burning capital.

By investing in areas with high growth rates, VCs allocate their risks to the ability of the compa...

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Any basic deal structure has the same logic: Giving the investors in the VC fund both ample downside protection and a favourable position for additional investment if the company proves to be a winner.

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The venture capital industry has four main players: entrepreneurs who need funding; investors who want high returns; investment bankers who need companies to sell; and venture capitalists who make money for themselves by making a...

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Funds are structured to guarantee partners a comfortable income while they work to generate those returns. 

The venture capital partners agree to return all of the investors’ capital before sharing in the upside. However, the fund typically pays for the investors’ annual operating b...

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Assuming that each partner has a typical portfolio of ten companies and a 2,000-hour work year, the amount of time spent on each company with each activity is relatively small. 

If the total time spent with portfolio companies serving as directors and acting as consultants is 40%, then part...

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Venture-funded companies attract talented people by appealing to a “lottery” mentality. Despite the high risk of failure in new ventures, engineers and businesspeople leave their jobs because they are unable or unwilling to perceive how risky a start-up can be. 

Their situation may ...

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By understanding how venture capital actually works, astute entrepreneurs can mitigate their risks and increase their potential rewards. Many entrepreneurs make the mistake of thinking that venture capitalists are looking for good ideas when, in fact, they are looking for good managers in particu...

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The value of any individual to a VC is a function of the following conditions:

  • the number of people within the high-growth industry that are qualified for the position;
  • the position itself (CEO, CFO, VP of R&D, technician);
  • the match of the person’s skills, reputation, ...

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I am passionate about Investment and most importantly investing in businesses directly. Had a conversation with the VC Lab on the formation of my new Venture Capital firm and I needed to compare my fundraising strategy with what I can find on the internet, and that led me to this article by Harvard Business Review (One of my favourite places to go lol)

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