According to a CB Insights study conducted in 2021, 38% of startups fail either because their funds run out or because they cannot raise new capital. For businesses that have progressed beyond the ideation stage and are ready to scale, venture capital (VC) funding is one of the most feasible forms of equity funding to bankroll their expansion plans.
The structure and regulations of capital markets and conventional banking often restrict startups from accessing traditional financing, and this is where venture capital funding plays a vital role. Early-stage firms, until they are grown enough to raise funds from the public market, can rely on and derive from the myriad advantages offered by venture capital funding.
An Overview of Venture Capital Funding
The Past
Venture capital funding emerged as a modern investment industry in the United States after World War II. Georges Doriot, a Harvard Business School professor, credited as the “father of Venture Capital”, started the American Research and Development Corporation (ARD) in 1946. ARD raised funds to invest in new companies that marketed emerging technologies and helped them get off the ground.
VC financing grew from a nascent investment sector to an asset class in the following decades. Corporate venture capital (CVC) units emerged before the dot-com burst of the 2000s, while micro VCs entered the field in the 2010s. Value additions like startup accelerators, investment marketplaces, pitch competitions, and venture incubators became standard offerings in the VC ecosystem.
The term 'unicorns' was coined in 2013 to refer to startups worth $1 billion or more. Investing in a unicorn was still risky, despite the high valuation. Despite the challenges, venture capital firms have continued to fund startups successfully.
The Present Growth Story and the Future Outlook
Despite the slowdown caused by the pandemic, VC funding increased at an unprecedented rate in 2021. Global VC investments peaked at a whopping $671 billion in 38,644 transactions in 2021. Though VC investments slowed in 2022 compared to the previous year, total investments for the three quarters have reached $389.7 billion,
The global market for venture capital was estimated at $233.9 billion in 2022. It is attributed to achieving a compound annual growth rate (CAGR) of 21.75% in the next five years and will reach $708.6 billion by 2028.
Avoid These Errors in Venture Capital Funding
The success of many VC-backed startups has elevated their collaboration stories to the levels of urban legends. Startup founders often need more clarification regarding the role and misplaced expectations regarding the contributions of venture capitalists.
Some of these myths include are as follows:
- VCs will take as much risk as the promoters of the firm
Venture capitalists are always considered bold investors willing to back risky and innovative ideas for greater returns. But VCs only accept risks after evaluating the business proposal objectively, and VCs generally take a less personal stake in startup investments than angel investors and crowdfunders. Aside from micro VCs, most are hesitant to fund firms in their early stages.
- Venture capital ensures business success
While money can solve many problems when starting a business, it isn't the only solution. However, your product's relevance, workforce expertise and the ability to effectually market your product- all contribute to your startup's eventual success.
- VCs add value to the business through mentoring and guidance
A common misconception about venture capital funding is that it provides more than just funds. It is naive to believe that all VC firms can provide expert advice or relevant connections to help you succeed in business. The non-monetary assistance varies from firm to firm, and it also depends on the representative appointed by the VC to your board.
- Raising venture capital has no bearing on how you conduct business
One downside of accepting venture capital funding is the pressure to scale big in a very short time. Your VC investor might be planning to recoup his investment as quickly as possible through an exit strategy such as an IPO, and may push you to work towards it faster. This may not give your business enough time to test the fundamentals of the product and market.
- Prominent firms are always better at venture capital funding
Unfortunately, big firms aren’t always a boon for startups. Signing with a large VC firm will undoubtedly increase your market credibility but also imposes certain restrictions. Therefore, selecting a firm based on your funding requirements and funding stage is best. Micro VCs, with fund sizes of less than $100 billion, are often a better investment match for an early seed-stage startup than large VC firms.
Future Trends
After dispelling some of the false assumptions, one must see the future of venture capital financing. The current indicators point towards some optimistic trends in startup investment.
For example, venture capitalists are shifting their emphasis to early-stage startups. Despite the overall decline in funding this year, this group sees increased investment activity. Secondly, with opportunities to invest in other geographies, VC firms are diversifying their portfolios by investing in non-profit organisations known as zebras. Finally, they are also shifting their focus to sustainable investing, considering social, environmental, and corporate governance criteria in their investment decisions. Only time will tell whether these patterns will become the standard.
Scalix’s Startup Mentor is a valuable resource for founders to connect with the most suitable mentor who can provide personalised advice on business strategy. Our mentors and experts will also assist founders in every step of their startup journey to keep the struggles of management at a minimum and your profits at a maximum.
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