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Try: Explaining VC in the simplest manner as possible — part 1

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VC 101.png

I recently gave a talk to a bunch of bright, enthusiastic and ambitious entrepreneurs whom graduated from a coding and digital marketing school (the founder is a childhood friend and when he asked, I said “yes” without thinking twice).

I was pleasantly surprised with the audience, whom were paying a great attention during the talk and they were very curious, the Q&A sessions was extended to more than 45 minutes. So I thought to write an article about the presentation for future reference and to help for those who were unable to make it. I’ll split this into 2 parts, 1- for the presentation and another 1 from the Q&A (to those questions that did not skip my memory)

Hope this helps!

VC 101 — What, Why, When and How?

VC 101(i).png

Venture Capital (“VC”) is not a new business model, it has been around since the industrial era, only then the VC does not publicise the firm like today. VCs are a professional fund managers that raised their funds from other Financial Institutions, Wealthy Family Offices and High Networth individuals, these guys are known as the Limited Partners (“LP”) and the executive levels management team of the VC are known as the General Partner (“GP”), they conduct the day-to-day operation of the VC.

After raising funds from the LPs, the GPs are the one whom invest into the startup. For most VCs, the GPs have invested their own money as well, together with the LPs to ensure that they have the "skin in the game".

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Good VCs are your partner that would want to see your company grow because it is in their best interest to ensure that the company that they have invested into grow by multiple times.

Hence, besides providing your company with the much required funding, they provide a lot more in-kind supports that are helpful to your company. Also, these supports are the important reason(s) on why you should choose to accept funding from VC A as compared to VC B.

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When would be the right time to raise funds? As you will be giving away the ever-valuable equity in exchange for cash to grow your company, whereby as one of the key concept in finance, giving Equity in exchange for funding is the most expensive way of raising capital.

However, there is no one direct answer to the best time to raise funds from the external party but as a rule of thumb, you should only raise funding when you know exactly how the fund that was raised can be utilised for the company’s growth.

This will then make your story more convincing as the potential investor(s) know, that you actually have a plan in mind on what to do with the money.

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For all the VCs whom are on the other side of negotiation table, they have their own thought process and what they are looking for when they are looking for a company to invest.

The slide above should be a guide for you on how to structure your pitch when you speak to them.

Next is the Capitalisation Table, every founder should know how your capitalisation table will look like before and after you raise fund.

Therefore, here’s the illustrative Cap table template that you can use.

https://drive.google.com/file/d/1A3YHSt1YyxmB-rO_AigyxV6aoUGbm0pe/view

Note: I actually got my formula wrong as I whipped out this Cap table in 5 minutes, one of the member of the audience pointed it out to me (shout out to you) and I have updated it since.

Part 2 will be about technicalities (ie. Valuation method, all the rights for the investments).