Sandeep Chanana · Follow
4 min read · Aug 29, 2022
Been in the VC space for a while now. Have attended close to a 100 pitches by vibrant and energetic startup founders across the US, India & South east Asian markets. And am still learning everyday.
This is a small journey to enable other aspiring enthusiasts who wish to get into VC and expand their knowledge base.
I plan to keep adding my knowledge and updating you all on my VC journey.
For now, some basics to start with….
What is meant by venture capital (VC) funding?
Venture capital funds are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small- to medium-sized enterprises with strong growth potential.
How do venture capital funds make money?
VCs make money in two ways. The first is a management fee for managing the firm’s capital. The second is carried interest on the fund’s return on investment, generally referred to as the “carry.
Carry is calculated as a percentage — typically between 20% and 30%* — of the return on investment after limited partners have been paid out 1X their investment. Carry is split (though not always equally) between partners.
What’s the difference between venture capital and private equity?
Private equity is capital invested in a company or other entity that is not publicly listed or traded. Venture capital is funding given to startups or other young businesses that show potential for long-term growth.
What do venture capitalist get in return?
The investors get 70% to 80% of the gains; the venture capitalists get the remaining 20% to 30%. The amount of money any partner receives beyond salary is a function of the total growth of the portfolio’s value and the amount of money managed per partner.
The Five Stages of VC Funding Explained
Stage 1: Seed capital
Stage 2: Startup capital
Stage 3: Early stage/first stage/second stage capital
Stage 4: Expansion stage/second stage/third stage capital
Stage 5: Mezzanine/bridge/pre-public stage.
Stage 1: Seed capital
The descriptor “seed” is appropriate here, since it suggests money that will fuel a startup’s growth down the road. At this point, the leaders of a startup may not have any commercially available product yet and are instead most likely focused on convincing investors why their ideas are worthy of VC support.
Seed funding rounds are typically small and are channeled toward research and development of an initial product. The money may also be used for conducting market research or expanding the team. There are seed accelerators out there, like Y Combinator, that accept applicants, provide seed capital and offer an opportunity to demo a solution to major investors.
Stage 2: Startup capital
This stage is similar to the seed stage. With initial market analysis conducted and business plans in place, companies look to begin marketing and advertising the product and acquiring customers.
Organizations at this stage likely have at least a sample product available. VC funding may be diverted to acquiring more management personnel, fine-tuning the product/service or conducting additional research.
Stage 3: Early stage/first stage/second stage capital
Though sometimes called “first stage,” this stage only comes after the seed and startup ones in most cases. Funding received at this stage will often go toward manufacturing and production facilities, sales and more marketing.
The amount invested here may be significantly higher than during prior stages. At this point, the company may also be moving toward profitability as it pushes its products and advertisem*nts to a wider audience.
Stage 4: Expansion stage/second stage/third stage capital
Growth is often exponential by this stage. Accordingly, VC funding serves as more fuel for the fire, enabling expansion to additional markets (e.g., other cities or countries) and diversification and differentiation of product lines.
With a commercially available product, a startup at this stage should be taking in ample revenue, if not profit. Many companies that get expansion funding have been in business for two to three years.
Stage 5: Mezzanine/bridge/pre-public stage
After reaching this juncture, the company may be looking to go public, given that its products and services have found suitable traction.
A small attempt towards sharing the knowledge of my learnings.
Stay tuned for more small byte sized learning. Will keep adding more.
VC for dummies Chapter 2 here…. which covers some common angel investing terms , difference between VC and Angels.
In the third edition, i talk about the risks associated with VC, requirements to enter into VC, min investments, some questions to seek from founders when you review startups & getting started.
Do give me a clap and share ahead (i love being motivated).
