Basics of venture investment - what you need to know before signing a contract with VC

Many startups are often looking for investment in the next round. But the venture capital market (VC) is very complex and for correct perception of this market it is worthwhile to deal with some aspects - this will allow you to avoid problems when making the first investments or evaluating the venture capital market within your project. In any case, when accepting investments, it is important to examine all the features of investments in order to avoid potential problems with the forced sale of your company.

What you need to know about the rounds of investment
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After the “rise” of the next round of investments to a limited list of new partners, the company closes the round for three to five years. After this period of time, the situation repeats and the company opens a new round. Usually several rounds are divided: pre-seed round (this round provides funding for prototyping, business angels and accelerators investing), seed round (similarly used for prototyping, but funds can also be funded), round A (commercial version of the product), round B (designed to maintain growth), Round C (opens for a sharp jump in the market) and Round D (usually used before going on an IPO or takeover).

After closing each of the rounds, the company uses the proceeds to grow and achieve its objectives. Founders need to understand that one VC may not have enough funds to support funding for each round, so you need to take this into account when opening new rounds.

How do funds evaluate the return on their investment?

Most of the founders of startups stop being interested in a potential investor after displaying several well-known logos. Almost no one considers the previous transactions of the funds in order to assess the possible risks for their company. But according to statistics, only 7% of investments in start-ups pay off, so investment funds carefully approach the choice of start-ups and push them to sell the company in case of problems with return on investment.

Acquaintance with the portfolio of the venture fund will allow you to understand what action to expect with the further development of the company or any problems. Try to avoid investments from funds with unrealized investments - they will more often than others try to force them to sell the company before you want to do it.

How venture funds evaluate investment

Investment funds often estimate investments based on the company's market capitalization. But there are those who evaluate investments based on financial indicators, focusing on the sale of other companies in the secondary market. In addition, for financial indicators, internal forecasts of analysts and information on the exit of other investors from the company are used.

When making investments, it is important to understand exactly how the fund manages its portfolio. Based on this, one can understand the interests of VC representatives on the board of directors and their potential behavior in various situations. This is especially true for the difficult period for the company - many funds that are sensitive to their portfolio and are trying to save investments by any means and are becoming virtually uncontrollable at this time.

What should the partners of the venture fund look like

For VC, it is typical to hire specialists with an MBA, and when considering a foundation, you should always pay attention to the amount of time worked by your partners. If at junior positions a turnover of two to three years is permissible, then if the senior partners left the fund, this is an alarming sign for the investment fund.

Such information will not be provided immediately, but after receiving detailed information about the venture fund, be sure to pay attention to each such indicator. Moreover, if the VC refuses to provide information, this can also serve as an alarming sign - it is worthwhile to avoid such funds if possible.