Like angel investing, venture capital is a form of private equity. Venture capital firms are usually organized as partnerships. They raise money from institutional investors, such as pension funds and endowments, that the VC partners then invest in promising startups. This is a step up from angel investing. Although VCs are also focused on early stage companies, they typically are interested in a rarified breed of company—ones with billion-dollar market prospects and the potential to return to 10 times or more the initial investment. Some of the biggest names in tech were backed by venture capital, including Google, Facebook and Uber.
While Silicon Valley is well known for its clubby VC network centered on Sand Hill Road, VCs can be found in many areas of the country. In addition, a growing number of corporations have created venture investment arms, including Google, Dell, General Mills and Walgreens.
Community Development Venture Capital (CDVC)
Venture capital is often called “vulture capital” for good reason. But there is a kinder, gentler form of venture capital offered by certain Community Development Corporations (CDC) and Community Development Financial Institutions (CDFIs).
As their name implies, Community Development Venture Capital firms work towards a broader goal of strengthening communities, especially in underserved and low-to-moderate income areas. So they look for both a financial and social return. Many are structured as non-profits, and get their funding from big banks looking to fulfill their Community Reinvestment Act requirements, foundations and the federal government. Like conventional VCs, they make equity investments in companies, although some may also employ revenue-sharing or warrants.
CDVCs also provide technical assistance and tend to be less impatient for an “exit,” or sale of the company.
The Community Development Capital Alliance provides a listing here: http://cdvca.org/cdvc-fund-database/national-cdvc-funds/
- A venture capital imprimatur can lend prestige and credibility to a young venture
- VCs will generally open up their considerable rolodexes and connect their startups to people and resources that can help them grow
- VCs invest large amounts of money—typically more than $1 million—which is good for capital-intensive companies or ones that want to get big fast
- That prestige and money comes at a price: VCs typically expect a big chunk of equity (meaning ownership of your company) in return, and founders are likely to get further diluted in subsequent funding rounds
- VCs are focused on high growth opportunities and you may be pushed to grow faster than you like
- VCs typically look for an “exit” – either a sale of your company or an IPO—within 5 to 10 years
- The personal stakes are high. If founders do not execute according to plan, they may find themselves out of a job. One study of venture-backed companies found that founders were replaced by a new CEO than 50% of the time!
Tip: Don’t waste your time unless you are going for the big leagues