How Venture Capital Works by Alejandro Cremades

Gaining VC funding can be a long and confusing process. To reduce confusion it is important that founders know the fundamental structure of funds, as well as the main components of the process.

  • How helpful? Scale of 1 to 5

5.

  • Topic Tags

VC fund structure, VC funding timeline, VC fundraising process, VC funnel,

  • Relevant questions addressed

What is the structure of a VC fund?

What does the process of getting funded by a VC look like?

What are some things to look out for when seeking VC investors?

  • Summary bullet points
  • VC fund roles
    • Analysts: junior employees tasked with market research, company analysis, and potential deals scouting
    • Associates oversee analysts
    • Principals have the power to make investments but they do so following firm strategy
    • Partners (general or managing) decide on investments, handle the fund’s strategy, and take care of fundraising and the big picture. Managing partners also manage the day-to-day of the fund
    • Venture partners are strategic allies whose role is simply to scout deals.
    • Some founders with a strong relationship to the fund temporarily collaborate with it to analyze potential deals
    • Limited Partners are simply those who have invested in the fund
  • Steps to VC funding founders should
    • Identify what VCs might be interested by analyzing VC lists, then find someone in their network who could introduce them
    • Get a call with the VC which can lead to requests for a pitch deck and potentially an in-person meeting
    • If all of these steps go well the VC might offer a term sheet to the company, representing an outline for a binding agreement
  • After a term sheet, the VC undertakes a due diligence process to analyze the company. If successful, once the details of the agreement are finalized the funding will be official
    • This process usually takes up to 6 months
  • VCs make money
    • Through fees on assets under management
    • Through successful exits and carried interest
    • VCs look for companies that can give them high returns, as startup investing is risky
  • VCs seek involvement with the company to protect their investment and make sure its value meets their goals
    • They seek Board representation or access to influence the company’s decisions
  • Some VCs bring value outside of capital, in terms of knowledge, expertise, resources and network
  • Founders should seek VCs that are actively looking for investment opportunity at that moment and try to move efficiently. Founders should also make sure that the VCs they are working with are a good fit for them
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