If youâre tuning in to this post, you may have heard the term Venture Capital being thrown around, but perhaps never fully understood the core concepts behind it.
The goal of this post is to explain Venture Capital in simple terms, to hopefully foster an understanding of the role Venture Capital plays in the startup ecosystem.
Venture capital is a form of financing that individual investors or investment firms provide to early-stage companies that appear capable of growing quickly and commanding significant market share.
This financing is generally offered in exchange for equity in the company.Â
Venture refers to the risky nature of investing in early-stage companies (typical startups with unproven businesses). Investors who provide this financing are called venture capitalists (or VCs).
The term VC is often used to refer to venture capital firms, individual venture capitalists, and the broad category of investment into risky businesses.
Venture capital is, by its nature, a dance between the interests of founders and investors.
Venture capitalists aim for the capital (financial assets or money) they invest in a startup to dramatically increase in value over time, as the company grows. That value will be paid out to investors, founders, employees, and others who hold stock in the company in the event of some kind of exit. To maximize the chances of an increase in the value of a companyâs stock and in a successful exit, venture capitalists often provide mentorship, connections, and more to the founders they fund.
On the other hand, the venture capital business model doesnât care if your company fails (it relies, on the massive success of only a few companies).
Venture capital pushes companies to grow very big, very quickly, and venture capitalists can pressure or even force founders into making decisions for their businesses that serve that growth over all else.
No matter which financing structure is used in an investment deal, venture capitalists are always purchasing part of a company.
Founders want to hold on to as much ownership as they canâbecause more equity usually (though not always) means more controlâwhile raising sufficient money for their company to achieve desired growth.
In a Nigerian context, a typical startup will be paystack, you must have heard of its $200 million dollars acquisition by Stripe. In this case, the founders started the venture, and grew it to an extent(with the help of funding from venture capitalists), then when an offer for the acquisition came they sold to Stripe(this event is called an Exit)
With this acquisition, the investors (angels and VCs), founders, and early employees will cash outđ, depending on the amount of equity each entity(person) owns.
Well, yeah, I hope this helps, if it doesnât, iâ convinced without a doubt that in our upcoming series, youâll get more conversant with these terms and big grammarđ.
For now, if you have anything that feels confusing in this article, please do well to share your thoughts in the comments section.
See you in the next episodeđ