The purpose of this first part is to present the entire venture capital business. The goal is to enable entrepreneurs to anticipate and better understand the reactions and behavior of financiers, hoping that this will facilitate their future exchanges. To do this, we will try to answer various questions: What are the main areas of activity of the venture company? What is his income model? What is the typical organization of a venture capital firm and what are its management rules? What problems does a venture capital firm face? What is a typical investor profile?
To formulate ideas and before describing in detail the various actions listed above, let’s say that the total duration of the process is about eight to ten years: several months to determine the strategy, from twelve to eighteen months to raise funds, from two to three years to find companies that the venture capital company wants to finance, from three to five years so that the investments really create value, then from one to three years to find the best way out (company transfer, listing, etc.). This process takes place as many times as a team of investors attracts and manages funds. Later we will see that, from the point of view of the entrepreneur, it is important to know from which fund the investor can return to his capital when he manages several, and especially at what stage of the process the fund finds a question. Let’s say that the longer the venture capital firm is in the process, the new investments will need to quickly create value.
Types of funding of the capital venture. Like any business, a venture capital company must first determine a strategy. Basically, she has to determine the investment policy, namely: the areas of activity in which she will invest (biotechnology, nanotechnology, electronics, telephony, telecommunications, e-commerce, logistics, “traditional” industry, etc.); geographical areas in which he will make these investments; maturity level of the companies we are looking for (are we at the idea stage, first product, first sales, the beginning of international activity, etc.?); the type of risk that the venture capital company wishes to accept (product risk, customer risk, industrialization risk, etc.).
It is on the basis of this investment policy that the venture capital company will raise funds (see the next step in the process). An entrepreneur wishing to use a venture capital firm must clearly define the investment strategy of the venture capital company to determine if the proposed project can match what it is looking for or not. It should be noted here that this is not only a question of a “good project” for finding a financial partner, but it is also necessary that the project respond to a request.
In this case, these are several thousand people, each of whom will entrust several thousand euros to the venture company. In any case, fundraising is not easy. Indeed, the type of investment offered to subscribers has two main disadvantages: illiquidity. As soon as the venture capital company collects the money, they invest in companies that will invest them in their development projects, which will take effect only after a certain period of time. about several years. Thus, there is no doubt once a stake in the company’s capital to “restore its rate” in the short term.
Thus, from the subscriber’s point of view, investments in venture capital do not provide an opportunity to exit before the date of liquidation of the fund, unlike, for example, some direct investments in the stock market that can be relatively easily withdrawn. A relatively long investment horizon, about eight years. As noted above, the duration of the entire process of investing / monitoring / withdrawing funds is this order.
Therefore, venture capital companies must, in order to remain motivating, offer higher returns than those offered by more liquid investments or in shorter terms. Obviously, a venture capital team can qualify for a fundraiser only if it can qualify for performance in the range of 20 to 30% per year! Woe to the teams that do not perform, they will not collect more funds and will be forced to disappear.
At this second stage of the process, the venture capital company meets with potential underwriters, presents them their investment plans and expected returns and tries to convince them to give them money for investment.