Feb 18, 2022
Venture Capitalists And Their Myths
Venture capitalists play a vital role in startup funding. But many myths are going around the market about venture capitalist firms that need to be tackled.
Who Is the Venture Capitalist?
A venture capitalist is an investor who invests in small or new companies in exchange for equity or convertible debt. Venture capital firms evaluate the growth potential of the companies before making investments. New startups turn to VCs for their startup funding to scale their businesses.
Venture capitals are usually incorporated as limited partnerships. Their partners invest their money in venture capital funds, making investments in startups or small companies. Venture capitals generally face high risk in these investments due to uncertainty about the success of startups. But when these companies become successful, the investment return is substantially high.
5 Myths About Venture Capitalists
Myth 1: Early traction is effortless
In older times, raising seed funding was not considered a huge task. Investors for business only need to see whether the company has some business going on that generates decent revenue for the company. But this approach of investors has changed a lot over the years. Now, investors look for several metrics before investing anything in the companies. They evaluate the growth rates, MRR, CAC, etc., which usually gets visibility at the later stages of the company. So, it's not easy to generate funds through venture capitalists.
Myth 2: All Venture Capital-Funded Companies Are Set to Achieve Success
We often see that people tend to connect their success with the number of funds they generate. Founders believe that if they raise a high amount of funds through venture capital, they can achieve huge success in the market. However, this is true in some ways, not completely. Money does help startups with that initial push or put the foundation of their business. But to achieve success in the market, many other factors also play an important role.
Myth 3: Venture Capitalists Take High Risks While Investing Funds
This statement is again somewhat true but not a hundred percent. Venture capital investments for startups are surely like a gamble. A lot of uncertainty involves around the company's success. But even if the companies turn out to be a failure, they would not be in a beggared situation. This is because when venture capital firms make investments. They charge an annual fee of two percent over-committed capital over the fund’s life. They also charge a specific percentage of the profits earned by the companies at the time of exit. These VC firms recover their expense and losses from their charge’s annual fees. This keeps them in a good position in terms of revenue.
Myth 4: Venture Capitalists Offer Great Advice and Mentoring
One of the reasons startups turn to venture capitalists for their startup funding is that they bring much more than money. Venture capitalists have high experience and in-depth knowledge of the industry. So it is obvious that the startups receive not only funds. They also have industry expertise, a broad network, a wide range of services, etc. However, it is seen that not all venture capital firms provide active mentoring to startups. In some cases, they do, but others only prefer to do a little over cheque signing.
Myth 5: Venture Capitalists Investment in Businesses
While this is a clear fact but not exactly true. VCs invest their money in the entrepreneur or the founder of the business. The founder is the person who implements the strategies and aims to achieve the highest success. So it is more about the entrepreneur than the business. Venture capitalists like to believe that when an entrepreneur gains more visibility in the market or has a huge network connection, his business is heating up. So they always prefer to invest in the entrepreneur.
With the rise of startups, VC funding is also boosting. Hence it becomes very important for startups or small companies to understand venture capital firms and how their investments work. We tried to explain some myths related to venture capitalists. We hope that it will help people understand their knowledge about VCs.