You’ve decided to jump in to private investing. You’ve already asked yourself if you should invest at all and discovered how to participate. Now that you’re ready to invest - how does it actually work? Who is giving money to whom and what are they trying to achieve?
First, you start with a venture capital founder - an entrepreneur that starts a company with an industry-disrupting idea. Think Zoom, Peloton, and Coinbase as recent examples. The company must grow, scale operations, and eventually become profitable to become successful.
Second, the Venture Capital Firm (VC) - a group of people who specialize in finding the next trillion-dollar company before they even have profits - funds the founder with the capital necessary to realize their potential. In exchange, they become equity owners of the business and work in partnership with the founders to increase the chances of success. Some of the most well-known VCs include Accel, Bessemer Venture Partners, Lightspeed, Sequoia, IVP, Benchmark, and a16z.
Third, the investors, like AWM and other family offices, then put money to work with venture capital firms to target the outsized returns.
The ideal end result is an exit (sale) that generates for the investors, VCs, and founders an outsized return. Without the idea and execution, the VCs and investors would not be able to capture this return. Without the capital invested, the company would fail.
In this week’s episode, Brandon and Justin dive deeper into this process on how the venture capital investing works, the different seed and funding rounds, and what to expect throughout as an investor.
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EPISODE HIGHLIGHTS:
- (1:15) Who are the players in venture capital? Who are the players in these deals?
- (2:03) Venture dates back to post-World War 2 with wealthy families investing in very early companies.
- (2:22) The venture capital managers specialize in finding the best new companies. The VC aggregates money from investors and searches for portfolio companies to make investments in.
- (2:33) RIAs and family offices, like AWM, deploy capital to these venture capital managers to find outsized returns.
- (3:05) The maturity of the company is divided up into seed, early, and growth stages. A company will usually raise money multiple times before it IPOs, is acquired, or fails.
- (3:36) The other key player is the entrepreneur. This is the company founder(s) that have a great idea or business model and needs capital to make the business successful.
- (5:10) There are different flavors of venture capital managers. They usually specialize in a niche or maturity level of the company.
- (5:30) In general, venture capital is high-risk high reward. Most small businesses are not considered venture capital. Venture capitalists are looking for companies to generate outsized returns.
- (6:30) The earliest stage of venture capital is angel investing, pre-seed, or friends and family. The next stage is generally called the seed round.
- (7:20) After the seed round, they start calling the funding rounds A, B, C, D, and even sometimes E and F.
- (8:50) Most venture capital first stays in its sweet spot and focuses on a certain maturity stage of portfolio companies.
- (9:02) The investors (VCs) are making a bet that the founders will take the money (capital) and grow the business and sell it in the future for a much higher price.
- (9:37) The founder or entrepreneur knows they need the capital to grow and invest in the invested capital in right people and resources to help the company continue to grow.
- (10:46) The marketplace is getting more competitive when it comes to how venture capital firms can add value to the founders and help increase the chances of success.
- (11:22) The best VC funds knock it out of the park, the worst VC funds do worse for investors than the public market. This is why understanding the dispersion of returns and getting access to the best managers avoids the crap of Silicon Valley.
- (12:05) Founders picking VC firms to work with and investors deploying the capital to VC firms know there is persistence or repeatability by the best firms in VC. This makes getting access to the best difficult and competitive.
- (13:00) Founders with the best ideas will take capital from many of the best VC firms to gain the diversity of thought and value that can be gained from the VC's expertise.
- (13:35) An example is if you are a young cloud company you would want to partner with Byron Deeter and Bessemer Venture Partners because of his expertise and track record.
- (14:24) There is a lot of money chasing Venture Capital right now because it is sexy and easy to sell. It is hard to get into the top funds and the top funds are even reducing LPs to maximize their relationships.
