Venture Capital models
What is Venture Capital?
Venture capital is the funding of start-up companies and small businesses by investors whom believe in their long-term growth potential. Given that start-ups lack the access to capital markets, venture capital enables these small firms to receive the necessary funding. Venture capital is becoming an increasingly popular source for raising capital, given the limited funding available from other debt instruments or loans that require hard-asset backing. It is key to the innovation life cycle- which is the beginning to a company’s commercialization of its innovation.
Venture capital generally comes from high-income earning investors (Angel Investors), investment banks or any institutions that pool similar partnerships or investments. The funding can then be provided in the form of money, and/or it can be in the form of technical or managerial expertise.
It is important to keep in mind that for investors, the risk of investing in such firms is high. However, what makes the investment attractive is the potential above-average returns.
What is the process to get an investment from a Venture Capital Firm?
Before funding, businesses need to submit a business plan presentation deck (or a short summary presenting their vision and the company) and a dedicated Venture Capital Financial Model either to the venture capital firm or to an angel investor. If the party is interested in the proposal, the firm/investor performs due diligence, meaning a thorough investigation of the business model, product, management and operating history (including many other aspects of the firm). Once this stage is done, the firm/investor will request equity for the investment in exchange for fresh cash and other assets provided to the company. This thus enables investors to potentially have an active role in the company should this be via the board of directors, as mentors or as simple advisors. Some investors also prefer to remain passive in agreement with the start-up founders. The capital is provided in rounds, meaning many financial rounds occur to ensure that the venture is meeting the milestones required before receiving the next round of capital. The investor ultimately exits the company through either mergers, acquisition or Initial public offering (IPO) after an average period of 4-6 years.
The Harvard Business review estimates that 80% of the money invested by Venture Capitalists goes into the building of infrastructure and the acquisition of resources necessary to grow the organization- in expense investments (manufacturing, marketing, and sales) and the balance sheet (providing fixed assets and working capital).
Is Venture Capital Model always the best source of funding for a start-up?
While the Venture Capital Model is an excellent source of capital and advice, it must not be forgotten that, according to many professionals in the entrepreneurial world, receiving an investment from a VC Firm can also be detrimental for a start-up’s success. For example, the investment can significantly increase an organisation’s financial risk level, reduce the founders’ control of the organisation, and reduce the overall flexibility in strategy and operations. This is mainly due, for example to:
- o Higher levels of investments in infrastructure and HR resources despite high risk levels
- o Compulsory “aggressive” legal clauses to receive the investment provided by VC firms to minimise their exposure to financial risk (eg: ratchet clauses, progressive liberation of capital according to objectives etc.)
- o Loss of power: though alliances with other investors can be made, founders can mathematically lose their majority stake and voting power and independence on the board (<50% of votes).
- o Some VC professionals can be misleading in their strategic advice as there can be strong discrepancies that can progressively appear between the VC’s objectives (ie: generating high financial returns in 4-6 years) and the entrepreneur’s objective (building a great solution to a tough to tackle issue).
Therefore, according to a start-up’s situation and needs, before thinking about getting an investment from a VC, it is sometimes better to:
- o get investments from Private Individuals or Angel Investors to split equity and power
- o postpone the investment to a later stage
- o generate cash generating revenues to fund the activity needing cash
- o build a network of advisors and mentors who do not have a significant equity stake and voting power
- o get a loan from a bank or grants from specific organisations
Where can I download Venture Capital Financial Models, pitch decks and cap tables?
As per given above, there is a variety of venture capital models needed both to evaluate the potential investment made by an investor/firm and for firms to make themselves attractive as an investment. On Eloquens, authors have provided both to investors and entrepreneurs a variety of venture capital models such as business plans, PowerPoint pitch decks, excel cap tables, excel VC financial models and valuation templates (and much more) that help you in doing just that.
To learn more about the Venture Capital Model, click on the following links:
- Educate employees, founders, and others in how liquidation preferences affect financial distribution in exit scenarios200 remove_red_eyefreeby Michael Dempsey
Venture Capital Method (Single Round Financing)A full model enabling an entrepreneur to understand assumptions of both sides of the table in a single round financing350 remove_red_eyefreeby Prof. Moana Vercoe
Ultimate Startup Cap Table and Return Analysis Excel TemplateSample cap table excel template with exclusive waterfall return analysis.283 remove_red_eyefreeby Alexander Jarvis
Sample Financial ModelTemplate for determining cost realities and financial projections for potential investors' demands.553 remove_red_eye
SaaS Model & KPIsA simple model to define and track your key metrics as a SaaS Startup271 remove_red_eyefreeby Ryan Carson
S3 Cap Table TemplateA cap table file to help entrepreneurs structure and understand their financing rounds and increase their performance148 remove_red_eye
Three-Stage Free Cash Flow for the Firm (FCFF) Valuation ModelValue the equity in a firm with three stages of growth119 remove_red_eyefreeby Prof. Aswath Damodaran
Financial Model Assessment ReportA checklist for assessing financial models82 remove_red_eyefreeby Danielle Stein Fairhurst
S3's Operating Model TemplatePrecise calculator for business expenses, overall cash needs and revenue model.122 remove_red_eye
Dummy Cap Table & Returns Analysis - Round BExample Pro Forma Cap Table for a Series B company (three tranches of A, plus warrants)84 remove_red_eyefreeby Lindsay Meyer
Startup Excel ModelA startup financial model that can be sent to a Venture Capital, Private Equity Firm or Hedge Fund.184 remove_red_eyefreeby Robert H. Hacker
Internet Business Financial Model SIBM - SpartinaManage your Cash, Increase Startup Revenue & Grow your Profits104 remove_red_eyefreeby David Hehman
Startup Financial Plan TemplateOngoing document made to guide you in running your business, when in need of funding or financing.137 remove_red_eyefreeby Serious Funding
Excel Cap Table with Waterfall for Start-UpsModel for pre-funded start-ups showing pre-money and post-money financing.120 remove_red_eyefreeby Prof. Zach Shulman
How to Calculate A Return On Investment (Excel Basics)Calculating an investor's return using the "cash flow method"34 remove_red_eyefreeby Fred Wilson
10 Rules of Thumb for Start-up Investment ValuationExplaining valuation with hypothetical example.32 remove_red_eye
Sample Executive Summary for InvestorsBusiness plan executive summary for first introduction to investors.69 remove_red_eye
How to Write a Business PlanTo-the-point business plan format methodology aimed at 15-20 slide length.230 remove_red_eyefreeby Sequoia Capital
How to write the Perfect Executive SummaryAn overview of the key elements for an efficient executive summary to investors.46 remove_red_eyefreeby Garage Technology Ventures
Ten principles for Angel Investors10 key principles to remember before investing in a seed-deal.44 remove_red_eyefreeby Joe Lonsdale
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