101 of Funding Innovative Ventures

1. Funding innovative ventures is particularly risky because of their innovative, dynamic, and unproven business nature. However, venture capital’s financial reward can be very high and outperform ordinary investment asset classes in a much shorter term (in terms of valuation and capital gain).

VC expected average returns are about 25-35% per year over a 10-12 year fund life.

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2. Venture capital or financing, including venture debt, are specific financing instruments or asset classes for capital investments focused on innovative entities. Strategies to “derisk” vary from investor to investor, instrument to instrument, or at the fine print level of a term sheet and shareholder agreement. Thus, funders and founders must be well-informed about the nuances.

Most returns in a VC's portfolio come from a tiny fraction of investments

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3. Fundraising rounds or stages labeled in capital fundraising indicate the (1) chronological sequence of the venture’s capital fundraising activity, (2) some indication of the stage of the company, and (3) the use of capital.

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4. It is common for innovative ventures to raise multiple funding rounds to (1) continue funding the growth ambitions and (2) reach exit targets for previous equity shareholders.

To achieve a meaningful exit at a US$1bil IPO, your startup would need to raise a minimum 4-5 rounds (To achieve a cumulative of ~US$100-250mil) and maintain an average revenue valuation multiple of 4-10x

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5. Innovative ventures resort to raising capital through equity financing (risk capital) because traditional financial institutions (e.g. banks) only offer debts (loans), which have a different appetite for capital risks and methods of making financial returns (e.g. interest and stable returns)

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6. Investment criteria of VC may change according to private equity market conditions to ensure that investment risks are well managed and to optimize investment capital.

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7. Not all VCs are interested in early-stage investment; some invest only in specific stages of the business, like early growth (Series A) or later growth stage (Series B - D). The key determinant factor is the size of a single investment into a company. More commonly known as Cheque Size.  

As an example, if a VC has a $100M fund pool to deploy, the VC needs to decide if that pool is splitting across a 100 companies ($1M/company) or only 10 companies ($10M/company). That  structure is usually set and agreed when VC raised from their investors (Limited Partners) that trusts them with their money to make a sizable return.

If the VC choose to invest 10 companies with an everage investment of $10M per company, they are usually not allow to make investments too much under or above what’s promised. So they are only interested (sometimes “stuck”) with companies that are raising rounds at least $10M or above. In case of a startup raises $30M for a specific round, this VC may join in together with other VC to fulfil what the startup is looking for.

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8. There are two main types of venture capital investors

• Individuals - as Angel Investors who invest their own money directly
• Institutional investors Investment firms that have fund managers manage the investment activities of other larger institutions

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9. The fundraising process or timeline varies depending on the stage of the investment, the interest in the investment, and the evaluation process

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10. When an investor offers a term sheet a key non-binding agreement that sets the basis of the investment terms and conditions, it is considered a key milestone in getting to a “gentlemen’s” agreement of investing in the startup.

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