If you read articles from this blog, you must have learned about venture capital firms. These entities take bold steps to invest in private equity companies that can not be empowered by traditional investment and debt providers. In this article, we will consider what venture capitalists do.
The job of a venture capital entity
Organize cohorts. Most venture capital firms, especially the big brother type organized cohort for startups founders. The cohort which usually lasts for weeks provides founders the privilege to learn from other experienced founders and venture partners. The knowledge gained is used by startups for business growth and expansion.
Although the aim of these startup founders for going that far to secure a seat in the organized cohort by the venture capital entity is to earn investment to manage and grow their businesses, not all of the founders are successful in these endeavors.
The venture capital firm that organized the cohort will screen the startups. One way they do this is by telling the founders to pitch their ideas. Then, the venture partners will decide which venture capital firms go home with the bounty.
Invest in startups. Venture capital platforms are known to invest in young private equity companies or as it is mostly called startups. The venture partners also called general partners will perform due diligence to ensure that any startup invested in worth it.
Venture firms do not own the money they invest in businesses. The general partners seek funds from investors such as wealthy individuals, large companies, pension funds, and insurance companies. These investors are limited partners. At times, a consortium of venture capital firms may fund a startup.
One criterion for investing in a startup is the ability of that startup to scale outside the country where it is located. One good example of startups that received funding and had scaled beyond national boundaries is Flutterwave.
Monitor their investment. Subsequently, venture capital firms monitor the invested fund. They do this by securing membership in the board of directors of that startup.
Monitoring is a two-edged sword. It gives the startup founders the opportunity to learn from experienced professionals and also enable the venture capital entity to oversee their investment.
The general partners as board members help the startup employ high-quality employees. Build a strong team, help connect the business on their journey to expand beyond borders, and provide advice to the founders.
Find an exit route. The journey of venture capital entity investment usually ends with an exit. There are two ways venture capital firms exit a startup.
One way is to sell the startup to a large company at an amount higher than the amount invested. The second mode of exit is through an IPO (Initial Public Offering). Most exit occurs after ten years of investment.
Jumia is a good example of a startup in Nigeria whose venture capital firm, Rocket Internet, exits by means of an IPO. The venture partners exit by listing Jumia in the New York Stock Exchange (NYSE).
In conclusion, venture capital firms look for growth startups to invest in, invest money on the startups, monitor it, and in future time usually a maximum of ten years exit the company.