Most entrepreneurs begin fundraising with angel investors. They use that capital to launch products, gain customer traction and prove that they’ve tapped into a real opportunity.
Then, CEO’s often search for venture capital investment to accelerate growth. That approach has fueled the growth of many great companies because VC’s are the best source of “smart” money.
I’ll give you two reasons why I say that.
- Venture capital firms invest as a full-time occupation. Angel investors, by comparison, don’t actually have to invest their money in a startup. They can put it in money market accounts or common stocks if they choose. Or, they can just kick the tires on an investment idea for months on end. Conversely, VC firms must invest. They’re paid to generate a sizable return, and they can’t do that with idle money. So they work hard to review as many deals as they can. And, because they invest in so many deals, they become expert at sizing up what works, and what doesn’t.
- Most VC firms specialize in a particular sector, or vertical market. They develop deep expertise in that market–the competitors, the customers, the market potential and even the potential acquirers. As a CEO, the key to finding “smart” money for your startup it to develop relationships with those Tier-1 VC firms in your sector. Look for ones that have achieved successful exits in your market.
Venture capital firms pool money from pension funds, insurance companies, institutional investors and other sources. They are in effect hired to produce a high return, in exchange for a high level of risk. After all, approximately 75% of VC investments don’t produce a positive return. That’s why VC’s look for investment opportunities that have the potential to generate a 10X return.
Many entrepreneurs are astounded by that requirement, but they shouldn’t be. As I said, VC’s are paid to generate returns commensurate with the risk of investing in startups. Since 75% of the investments won’t produce a positive return, VC’s must source and structure deals that the potential to generate at least a 10:1 return on their investment.
Actually, that’s not bad news for you as the entrepreneur as long as you find a SmartMoney VC firm. Why?
Because the right VC firm will have the experience and connections to catapult your growth AND ensure you achieve an exit. That’s the only way they can capture their return.
I describe how to find the right investors in the SmartMoney Playbook. It’s free, and you can grab it here.
While many entrepreneurs concern themselves with ownership percentage, I think this concern is unfounded. What you want is to partner with someone who can help you make the total pie much larger than you could achieve on your own. A SmartMoney venture capitalist can do exactly that. True, they’ll own a higher percentage than you may have liked, but you’ll own part of a much larger pie.
Given the size of their funds, VC firms look to put several million dollars to work per deal and to own a significant percentage.
Remember, VC’s are the ultimate source of SmartMoney. Your key to success is to pick the right ones for your business.
Watch, as I share what I’ve learned about working with VC firms.