There is a common notion among start-ups that money is the ultimate tool for implementing those big ideas that can change the world. It is the biggest hurdle start-ups strive to cross, and it usually seem like once it is crossed all i’s will be dotted, and all t’s will be crossed. Companies equate success to raising capital for building their desired business.
Tech companies are accessing billions of dollars right now, and these are the best times, based on the experience the start-up ecosystem is witnessing. Everyone Is hyped up about capital. To some extent raising capital is all it is capped to be as it can usher in game changing funds for start-ups. From another perspective, these venture capitals are not always suitable for all start-ups. Accessing venture capital has an ugly side to it which makes it unsuitable for certain businesses. Let us run through the good, and the bad quickly.
One of the most powerful skills that has become indispensable for start-ups is writing Pitch Decks. The start-up ecosystem is currently generating unprecedented amounts of Pitch Decks as a testament to the proliferation of start-ups globally.
For the most, these Pitch Decks are colourfully written to attract capital, and almost exposes the ignorance of founders. The temptation to access venture capital is easily identifiable in the almost desperate, and elaborate concoction written, but these documents seems to be oblivious of the stringent conditions attached to accessing venture capital. There is a problem that cannot easily go away; once you begin running on venture capital, stepping out becomes a difficult task.
To state this simply, most founders are ignorant of the peculiarities of venture capital. This is quite disturbing because venture capital partners are business investors, and investors have an angle. As a start-up founder, if you are ignorant of why your venture capital partner is interested in your business, then you should not even consider being partners in the first place. As a start-up you are required to understand your potential customer before selling an idea to them.
Now we will try to break the whole process down.
What is the source of funds for venture capital partners?
To become knowledgeable as you attempt to raise venture capital, also seek to identify the angle of VCs. Capital Managers recognize the high-risk asset class status of venture capital before deciding to invest. They recognize the implication of their decision.
Fund Managers who invest in venture capital become limited partners. Usually their invested funds are gathered from various sources which could range from University endowment funds, pension funds, or even the purse of the big corporations, to name a few. Their angle is to ensure that these funds accessed from different sources grows. Limited partners do not just seek the growth of their funds, but these growth must match prevailing inflation else the purchasing power of the capital pool diminishes. If the purchasing power diminishes the source of the capital looses money, and the fund Manager loses their job.
So this is how the angle of the VCs are charted, fund managers are mandated to grow their capital pool by 9% annually. To ensure that the growth of this capital pool matches up with the prevailing inflation rate in the country, lower-risk assets classes are more attractive. This is particularly effective for lower-inflation environments.
The fund managers spread the capital pool to low risk businesses which may include banks, bonds, and the index and tracker funds with a grasp of the stock market.
A much smaller part of the funds is reserved for high risk investments. It is a smaller part in the sense that it is dispensable. While the fund Manager can afford to loose this, there is an aspiration that the high risk investment will also present the opportunity for a high reward. The expectation is that the investment triples in worth or even performs much better than this. Start-up founders must therefore understand the process of venture capital, and the psyche of the investor before embracing the opportunity.