There are a lot of misconceptions about venture capital. One VCer offers his perspective – and tips – if you're considering, but hesitant, about this funding option.
Venture capitalists. You've probably heard all about them: They're greedy, they're out to steal your company, they want to run your life, and they don't add any real value. Except, of course, these statements are all untrue.
Over the years, a lot of unfortunate myths have surfaced surrounding venture capitalists. As a long time Chinese venture capitalist, I feel it's my responsibility to explore the truth and set the record straight. Below are five of the most pervasive myths surrounding venture capitalists, which need to be dashed so investors and startups can make accurate, well-informed decisions.
Myth No. 1: Venture capitalists are only interested in developed companies
While it's true that a lot of venture capital funds are invested in developed companies and the majority of venture deals are focused on companies in the latter stages, it is also true that a lot of venture capitalists enjoy lucrative success investing in early stage companies.
Using a systematic approach to early stage investing, venture capitalists can enjoy a relatively limited investment risk and develop strong relationships with the founders, allowing a mentoring process to be developed. Investing in early stage startups provides portfolio diversification, and it allows investors to be involved in making a positive difference in the world. Not to mention, although startup investment comes with inherent risks, there is a high potential reward that is tempting for many investors.
Myth No. 2: Venture capitalists just want to steal or take control of your company
If you've heard the term "vulture capitalist," you already know of this misconception. Many people believe that venture capitalists swoop in to invest in sick or dying companies, take control and eventually kick out the founder of the company. Of course, this runs counter to what a venture capitalist would consider common sense.
A venture capitalist thrives on a good reputation. They won't invest in a business that looks a step away from failure, and they won't interfere with a CEO who knows the industry and is doing a great job. Venture capitalists realize that founders of a business are more incentivized and determined when they have the control they need to manage the future and direction of their company. This works toward the benefit of all. More than anything, Venture capitalists invest in the knowledge, energy and success of entrepreneurs. If a venture capitalist doubted of these strengths, they wouldn't have invested in the first place.
Remember, a venture capitalist unscrupulous enough to try to edge you out of your own company or to micromanage your business is damaging their own reputation. As such, promising prospects are not likely to approach them in the future.
Myth No. 3: You need a formal introduction in order to approach a venture capitalist
Approaching a venture capitalist might sound daunting at first, but generally, we enjoy being approached, particularly on social media platforms such as LinkedIn. You don't need a formal introduction by a third party. However, entrepreneurs should be aware that venture capitalists appreciate you being selective and thoughtful. Consider who you are reaching out to, whether they invest in your field and whether they are likely to be excited by your business. Don't simply send out hundreds of templated messages. This demonstrates a clear lack of research and care.
For a cold LinkedIn message, it's best to get straight to the point. Introduce your company in a few short sentences, explain why you think your firm is right for the venture capitalist firm and be clear about what you are looking for. A well-researched and targeted approach works best.
Myth No. 4: Venture capitalists only add money, not real value
While venture capitalists have no desire to take over your company and micromanage your business, they are far more than just a deep pocket. They have years of varied experience. They have seen companies at various stages of growth, and they can provide interested entrepreneurs with out-of-the-box ideas and suggestions, which could be useful when it comes to troubleshooting problems and planning the future of your company. A venture capitalist can share their experience as well as provide access to certain networks and contacts to help your business grow.
Myth No. 5: Venture capitalists and angel investors are essentially the same thing
There are a number of differences between angel investors and venture capitalists. Angel investors are usually individuals with a high income who contribute their finances into the growth of a business at an early stage. Angel investors generally invest between $25,000 to $100,000. And although they can offer up their experience and business advice, it isn't strictly their job or place to build up your company.
A venture capital firm, on the other hand, will include a number of people, typically investors (limited partners), board members and individuals responsible for providing business insights and advice (general partners). The role of a venture capital firm is to find a business with high growth potential and, in exchange for financial investment and professional advice, the firm takes shares of the company. After a given time period, venture capitalists can then distribute the shares back to the owners through an initial public offering. There is also a difference in the amount of money invested. Venture capitalists invest, on average, $7 million into a company.
Hopefully debunking these myths has changed any preconceived notions you had about venture capitalists and given you a more thorough understanding of what to expect when you approach and do business with a venture capitalist. The most important thing to remember is that venture capitalists are just as eager as you to make your business a success, and for it to thrive long into the future.