Raising funds is not just a question of good idea. Why do some startups attract millions in a few months while others are struggling to convince a single investor? The Venture Capital (VC) is based on well -defined mechanisms that each entrepreneur must understand before getting started.
The operation of a capital venture fund
Unlike banks or business angels, VC funds do not lend money and do not seek immediate profitability. Their objective is to invest in very potential startups, to support them in their growth, then to resell their shares with significant added value.
The investment cycle of a VC
- Building of the VC : a VC fund collects capital from major investors (“Limited Partners” or LPS) such as pension funds, insurance, family offices or large companies.
- Selection of startups : VCS are looking for startups capable of multiplying their valuation in a few years (we will come back to the multiple valuation later)
- Support for startups : Beyond funding, some provide their expertise in recruitment, structuring and strategy, open their business networks
- Exit : after 5 to 10 years, they resell their shares via an acquisition, an IPO (very rare), a transfer to another fund, a liquidation (this happens)
Why don’t VCs finance all startups?
Whatever the quality of the idea and the founders, venture capital funds cannot afford to invest in moderate growth companies. Their model is based on a key principle: The Power Law.
- 1 out of 10 startups generate 80 % of the fund yields.
- 2 to 3 startups offer moderate feedback (1x to 5x investment).
- 6 to 7 startups fail or report little.
Consequence: A VC only finances startups capable of reaching a very high valuation.
The criteria that attract VCS
Capital venture investors are looking for startups with high expansion potential.
| Criteria | Why is it essential |
|---|---|
| A market> 1 billion € | A startup must contact a large market to justify a high valuation. |
| Strong scalability | The model must allow exponential growth without cost explosion. |
| A solid founding team | The VCs bet above all on entrepreneurs. |
| Validated traction | Arr, conversion rate, Churn … Figures take precedence over vision. |
| A clear exit potential | A VC wants to know how he will recover his investment. |
Example: a SaaS startup with € 2 million, 100 % growth per year and a potential market of € 10 billion presents an interesting profile for VCS.
Raise funds: the constraints to know
If the Venture Capital can accelerate the growth of a startup, it also imposes strong requirements.
- Constant pressure on growth : a startup funded by a VC must aim a very high annual growth rate In early-stage.
- A compulsory exit under 7 to 10 years : VCS must be able to resell their shares.
- An inevitable dilution of the founders : The more fundraising startup, the more its founders see their share decrease.
| Toulin | Average dilution |
|---|---|
| Seed | 15 – 25 % |
| Series A | 20 – 30 % |
| B series | 15 – 25 % |
| C+ series | 10 – 20 % |
An entrepreneur must strategically dose his lifting to Keep decision -making power.
What good practices to lift effectively?
-
- Tackle a large enough market : Without a market> € 1 billion, raising funds will be difficult.
- Anticipate your exit : Consider from the start that could acquire the company or how to go on the stock market.
- Master your dilution : Lift just what it takes at the right time to avoid losing control.
- Surround yourself with good investors : Beyond money, choose a VC that brings network and know-how.
- Accelerate immediately after lifting : A startup that slows down may find itself in difficulty.
Conclusion: Booking funds, a strategic choice
The Venture Capital is therefore not a solution suitable for all startups. He imposes a rapid growth, strong dilution and continuous pressure. To maximize his chances of success, an entrepreneur must (to put it simply):
- Understand the VCS model and their expectations.
- Ensure that his business has an attractive exit potential.
- Adopt a coherent financing strategy.
⏰ In the next article, decryption of VCS analysis methods to select their investments.
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