Your Guide to VC Investments
Venture capital firms offer opportunities for funding that can help your growth-stage business reach enterprise scale. A good venture partner can play an instrumental role in helping you achieve your goals and build your business. In the software world, this support can prove particularly valuable, helping you take the technical knowledge or specific market awareness that led to your initial success and combine that with resources that promote rapid, sustained growth.
VC organizations achieve this goal through a relatively simple framework:
- Invest in high-growth startups with significant potential for scaling.
- Develop a strong relationship with company leaders and provide opportunities for networking and knowledge sharing.
- Participate in company operations to support entrepreneurs and fill in resource gaps.
A partner that matches your needs can result in a strong relationship that ensures you and your staff don’t get burnt out trying to keep up with ever-shifting demands. Understanding what to look for in a VC begins with a deeper awareness of how the VC process works and what a partner can do to help you develop your business.
The Initial VC Investment
Choosing a VC to Explore
A VC will usually specialize in a few sectors where it looks to make investments. This decision is usually dictated by the source of the VC fund. At Insight Partners we specialize in working with software companies, particularly SaaS businesses. You don't want to waste your time pursuing a VC relationship with a firm that doesn't work with your type of business. In many cases, the best way to explore potential options is to connect with peers in your industry that have gone through the VC process that you don't necessarily directly compete with and see if they can connect you to the right VC firm.
Making Contact with a VC and Receiving an Investment
Besides focusing on certain industries, venture capital firms will typically emphasize specific attributes they're looking for in their portfolio companies. High growth potential is a must, but beyond that, a VC may also be working to fill in gaps. For example, if a fund has a lot of businesses that serve a specific market, the VC may look to diversify. When you contact a VC, your initial conversations will likely center around what makes your business unique, what markets you serve, and how those attributes fit with what the VC is looking for. It isn't always as simple as asking how quickly you're growing and going from there. As such, you should be prepared to speak about your mission, vision and goals, as well as the financial standing and growth opportunity from your business.
If the early conversations go well, you'll move on to submitting a formal pitch deck and, if there's still interest, making a presentation to key stakeholders at the VC. At that point, it's time to win them over by showcasing the strength of your business and the worthiness of investing in you as its leader. You'll want to detail your business, highlight how your technology fits into the marketplace, and make a strong case for potential scale.
If they're on board, you'll be presented with a term sheet that details what the investment will look like and go through due diligence. If no major red flags come up, the relationship will begin and you'll become part of the VC's portfolio.
The Benefits of Being a Portfolio Company
A venture capitalist offers much more than capital. Major benefits of working with a VC firm include:
- Access to strategic resources that provide infrastructure for your business. At Insight Partners, we provide support in sales, marketing and other key functional areas of your business to fill in skills gaps on your teams or train your leaders to take your organization to another level.
- Access to a network of high-growth companies facing similar challenges and opportunities, letting you network with other leaders and share ideas that are mutually beneficial.
- Access to consulting services and leadership expertise so you're aren't on your own trying to run a rapidly growing business.
Many high-growth software companies have just a few leaders handling responsibilities for the business. Burnout can ensue as the business expands, distracting leaders from what they do best. A good VC firm offers support to prevent this from happening, allowing you to focus on your business.
How VCs Differ From Other Major Investor Types
VCs are fairly unique in their hands-on work with portfolio companies, but they differ from other types of investors.
Seed funds or angel investors: These investors provide capital at the early stages of a business and are generally silent partners, making profit based on revenue growth. Generally, VCs enter the relationship later on as companies shift from startup to high-growth status. VCs are also not silent partners, but instead offer instrumental support.
Private equity firms: Private equity firms are highly numbers-driven. They typically take an almost scientific, analytical approach to who they invest in and what they expect from their portfolio. They will usually purchase a significant share in a business and take a large stake in guiding the organization, but tend to be fairly risk averse. VCs, on the other hand, tend to invest in high-growth companies where risk is high, but diversity their funding strategy to keep risk under control.
Institutional investors: You can also have employees own shares in the company, but this functions very differently than other investment firms. It is usually done as a perk to attract top talent without having to offer as large of a salary as competitors, giving workers a genuine stake in the business and incentivizing them to prioritize the same goals as the board.
How VCs Contribute to Industries
In many ways, the macro-influence of VCs is visible in the idea of total factor productivity (TFP). TFP is a complex economic metric used to identify an industry's output that is not explained by its inputs, such as labor. In practice, TFP measures how efficiently an industry outputs its end product, which often makes it a measure of the cost of innovation. Venture capital activity can promote TFP growth by injecting capital into industries that are growing quickly, leading to significant output increases and a much more efficient innovation process.
If you're a software business exploring rapidly growing market segments and running into barriers scaling your business model, then a venture capital firm may be a good fit for you. The VC can provide the day-to-day expertise and business management structure you need to focus on innovating and sustaining your growth efficiently.
In practice, when a VC targets an industry for investments it is identifying the rapid rise and progress happening in that sector.
At Insight Partners, we take a diagnostic approach to working with our portfolio companies. We work with executives and leaders to help them identify growth strategies and develop tactics to drive profitability, and we offer resources including training and potential staffing solutions to help them execute. We'd love to talk more. Contact us today if you want to chat.