Startup Lithuania pre-acceleration course: Startup Guide

Exercise 3.2.6 – Venture Capital Funds

Venture capital funds (VCs)

A venture capital (VC) fund is a professional group that looks specifically to fund startups. VC typically provides funding for early-stage, high-potential, and growth companies seeking to generate a return through an eventual realization event such an IPO (Initial Public Offering) or selling the company in any other way. This type of investor holds a lot of money available to invest in startups, but there are a few major downsides as well. Venture capital typically looks for larger opportunities that are more likely to be stable. It means that your startup should have a strong team and a need for a few million dollars to scale effectively. To secure their investments, these funds might require having some level of control in your startup.

If you decide that VCs funding fits your strategy and you want to achieve success in fundraising, first of all, you should narrow the type of VC you are targeting. VCs are of different types and sizes. They can be categorized along a few main dimensions: size and purpose of the typical investment, location, and industry sector. Generally, there are a few main types of VCs based on the purpose of the investment:

Early-stage financing:

  • Seed financing is usually a small amount that enables a company to get a start-up loan
  • The purpose of start-up financing is to finish the development of products or services
  • First stage financing is used when the company has spent starting capital and needs funds for taking business activities to full-scale

Expansion financing:

  • Second-stage financing is used to begin a startup‘s expansion in a particular way
  • Bridge financing may be provided as a short-term, interest-only finance option as well as a form of monetary assistance to companies willing to employ the IPO as a major business strategy.

Acquisition/buyout financing (even though it is not a VC fund by itself,  it might be worth to have this financial solution in mind):

  • Acquisition financing assists in acquiring a certain part of or an entire company
  • Management or, so-called leveraged buyout, financing helps a particular management group to acquire a particular product or even another company

Once you have narrowed down the list of targeted VCs, look at their most recent investments. Research how many investments they have made, what types of companies they invested in, and if they specialize in a specific sector or geographic location. Try to estimate the size of their investments, if possible. If your business closely matches with their most recent investments, that might be a good signal to proceed with figuring out how to approach these particular VCs.

Venture Capital Dictionary

To learn more about different terms related to Venture Capital and Private Equity have a look at this extensive Venture Capital Dictionary prepared by Triniti Jurex law firm.