Should you raise >$10M in early stages? - 101 Founder's Course In Private Equity & Venture Capital - 2 (2024)

So, in the last lesson, we learnt a little something about financing and its stages.

Here's the link to Lesson 1 in case you missed it.

Before we proceed,

If you are an investor, please fill this form.

If you are a founder, please fill here.

+1 to you from the ecosystem. :)

Now, coming back to our lesson, let's learn a few more basics today to help us sail the financial waters.

Seed Financing

Most complex and riskiest activity among the PE investment. It happens at the idea stage.

2 major risks involved - a) Capability of idea to generate the output. b) the marketability of the output once it has been generated.

Because this stage is so risky, there are a certain rules Investors follow -

  1. 100/10/1 Rule - Investor screens 100 projects, finance 10 of them, and be lucky & able to enough to find the 1 successful one.
  2. Sudden Death Risk - Where the founder stops/loses capability to work on the idea. Investors usually choose the incubator strategy to avoid this risk.
  3. Size of the market - Usually, the investors invest only in the markets they know. However, they may choose to invest in some ideas for philanthropy.

Startup Financing

The startup financing stage means financing a new company that starting its own initial operations.

It's risky, as PEI is still betting on the business plan.

Several ways PE insulates themselves from critical risk -

  1. Put option - This tool allows investor to sell back their share to the founder. It assumes that in case a business plan doesn't work out, the founder will have the money buy back the shares.
  2. Collateral - This is a pledge for the investor over some valuable assets of the newly founded company. It is usually used with the put option.
  3. Stock options for the inventor - Another way to reduce the risk to the business plan is to grant the inventor some stock options.

Balance between money and shares - The investor doesn't want to bear all the risk, i.e., own the majority chunk of the business, nor they want to have no say in the business, i.e., owning let's say only 1% in the company.

Early Growth Financing

Early growth Financing is the financing of the first phase of growth of a new company that has started generating sales.

Company needs cash to boost sales.

The risk for the investor is still high. Hence, the investor might help the company rewrite its business plan, if it deems fit.

Usually, financing at this stage is up to the end of 3 years since the start of a company.

This is it for today's PE & VC lessons.

In the next lesson, we will talk about Expansion, Replacement, and Vulture Financing.

Buckle up!! It is just the beginning of many more informational posts yet to come.

Also, you can use this link to Learn more about entrepreneurship on Medium.

See ya. Till then, Tata.

Should you raise >$10M in early stages? - 101 Founder's Course In Private Equity & Venture Capital - 2 (2024)


What is the 100 10 1 rule for venture capital? ›

100/10/1 Rule - Investor screens 100 projects, finance 10 of them, and be lucky & able to enough to find the 1 successful one. Sudden Death Risk - Where the founder stops/loses capability to work on the idea. Investors usually choose the incubator strategy to avoid this risk.

How much should I allocate to venture capital? ›

If you ask experienced VCs, they will tell you they like to target a 15-25% ultimate ownership range in each of their portfolio companies. They look to hit this percentage during the first round, and then maintain this percentage by exercising their Pro-Rata Rights in future financing rounds.

Why invest in early-stage venture capital? ›

Early-stage capital is a form of investment provided to set up the initial operation and primary production. Early-stage capital works by supporting the development of the product or service. The funds raised can also be used to market and commercially manufacture the product.

Should I invest in early-stage startups? ›

Exponential Growth Potential: Early-stage startups possess the capacity for explosive growth, often yielding returns that far exceed traditional investments. A tracxn report reveals that early investors in India's Unicorns experienced a remarkable 130x multiple on their invested capital.

How much venture debt can I raise? ›

The recency of funding - Generally speaking, venture debt providers who come in immediately following an equity raise will loan up to 40% of a funding round. So, if XYZ startup raised $20M, they would be eligible for up to an additional $10M venture debt facility.

What is the 80 20 rule in venture capital? ›

In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.

When to raise venture capital? ›

The best time to raise capital for a startup is when you have a clear idea of what you want to do and a clear idea of how much money you need to get to a milestone that will set a higher value for your company.

What is the 2 20 rule in venture capital? ›

VCs often use the shorthand phrase “two and twenty” to refer to the 2% of annual management fees a venture fund might take and the 20% carried interest (or “performance fee”) it would charge.

What is early stage venture capital? ›

The definition of early stage capital says that early stage capital is collected with the purpose of supporting the development of the startup company's products or services. These funds can also be used for initial marketing and manufacturing of your products and/or services.

What are the problems with early stage ventures? ›

Lack of funding: Many early stage ventures are underfunded, which can lead to cash flow problems and a lack of resources. 3. Lack of customers: Without customers, a business cannot survive. Early stage ventures often have difficulty attracting customers, due to a lack of awareness of their product or service.

What is the average rate of return for venture capital? ›

As discussed in the question above, the Internal Rate of Return (IRR), also known as the Annual Rate of Return, for a venture fund should be in the 15% to 27% range. There are approaches that GPs can look at to help improve the IRR results for their LPs.

What is the average return of venture capital? ›

They expect a return of between 25% and 35% per year over the lifetime of the investment. Because these investments represent such a tiny part of the institutional investors' portfolios, venture capitalists have a lot of latitude.

What is the 120 rule in investing? ›

The Rule of 120 (previously known as the Rule of 100) says that subtracting your age from 120 will give you an idea of the weight percentage for equities in your portfolio.

What is the 100 investor limit? ›

A firm that's defined as an investment company must meet specific regulatory and reporting requirements stipulated by the SEC. 3C1 allows private funds with 100 or fewer investors and no plans for an initial public offering to sidestep certain SEC requirements.

What is the rule of 110 investments? ›

For example, there's the rule of 110. This rule says to subtract your age from 110, then use that number as a guideline for investing in stocks. So if you're 30 years old you'd invest 80% of your portfolio in stocks (110 – 30 = 80).


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