Overview of VC Firms…Value to SMALL companies with BIG idea
Chief Development Officer
JB Fitzgerald Venture Capital
Andrew Liu & Nicholas Fainlight
Business development Associates
JB Fitzgerald Venture Capital
This White Paper is designed to provide a general overview of Venture Capital (VC) firms and the role they play in providing equity to fuel the growth of a company. VCs are different than angel investors primarily through their level of participation in the company business and their extent of ownership. Typically, VCs invest in companies that have achieved a level of traction in their market and need equity support to grow.
As a VC firm in structure, JB Fitzgerald Venture Capital actually is a “blended” equity firm whose mission is to invest AND support small companies, which may include companies in the “idea or concept phase” or those companies that need structure and resources to achieve their go-to-market strategy.
Venture Capital (VC) Firms have historically played a crucial role in facilitating business growth, streamlining research and development, and providing the financial and operational support necessary to scale a company. VC firms are typically diversified in their size, area of focus, investment stage, and degree of intervention. VC firms provide support to their entrepreneur through funding, business/industry expertise, operations, and network support. However, too much reliance on VC funding may result in a reduction of control in the business and a loss of founder equity. VCs typically look for high-growth companies with a strong team and a proven product and business model that shows evidence of traction.
The role of venture capital financing has seen a sea of change throughout the years. While venture funding initially started as a means of financing new, growing companies, it has since developed into a more holistic means of support. Modern day venture capital seeks to bridge the gap where traditional sources of funds actively cannot participate in financing new ventures. Venture Capital firms can add value in multiple areas, namely:
- Team and Skill Building: Sourcing and recruiting the right people, and building the right skills necessary for each step of growth
- Operations: Improving administrative, accounting, technological and legal capabilities
- Analysis: Through industry experience, creating a strategy and ensuring entrepreneurs measure, understand, and report the performance of their early stage companies
- Network: Providing entrepreneurs access to a network of potential investors and acquirers as well as partners to accelerate growth
- Brand name: Promoting an unfamiliar startup brand through marketing channels and VC brand recognition
In addition to providing funding, the operational support, network, and in-house expertise that VC firms provide play a crucial role in sustaining and growing the business.
Small, “niche” VC firms oftentimes can provide more value to the entrepreneur than larger ones. (And may, in fact, assume the role of “angel investor” initially to provide seed money for small companies with a big idea, but still very early on in development).
Some advantages to using a “niche” VC firm are as follows:
- Responsive, personalized support: Smaller VC firms oftentimes invest in relatively less developed companies, allowing them to provide more non-financial support and resources to their portfolio companies.
- Network in niche industry: Smaller VC companies oftentimes have an unparalleled network and experience in niche markets. For example, JB Fitzgerald provides access to pro athletes in the sports industry, a value-add uncommon in larger VC firms.
- Experience in a niche industry: Smaller VC companies oftentimes only focus on investing in high growth startups in certain industries. By capitalizing on their firm’s comparative advantage by narrowing the scope of their investment thesis, they ensure that portfolio companies receive the best support and experience tailored to their specific area of focus. (Specifically, gaining traction in the desired market for quick and profitable growth).
All in all, smaller, niche VC firms provide substantial benefits to companies operating in industries aligned with the firm’s thesis and need assistance in executing the Founders vision.
The most significant drawbacks to VC financing from larger VC firms specifically, and equity financing in general, include:
- Loss of control: With a large injection of cash and professional investors, VC partners may want to be involved with the companies’ operations. Depending on the size of their investment, they may want to have some influence over shaping the direction of the company.
- Minority ownership status: Depending on the size of the VC firm’s investment into your company, which could be more than 50%, you could lose management control and essentially give up your business
- Preferred shares vs Common shares: Some VCs (especially in the later stages) may opt for preferred stock, allowing them to receive payment on dividends and capital gains before common shareholders. If an entrepreneur’s company is sold or goes public, they may be receiving the payment last, after all investors are paid off.
Differences in VC companies
Most VC companies typically provide funding and operational support to startups. (Vs. angel investors who typically just invest and don’t participate) Primary differences between VC companies include:
- Brand Awareness: Larger VC firms are generally more well-known and established than smaller firms
- Size of funds: VC firms oftentimes only invest at certain stages of the deal cycle. Seed-stage investors typically invest up to $250K in the seed round, while later-stage investors may invest millions in the series rounds
- Industry of focus: Certain VC firms focus solely on investing in companies within their industry of focus.
- Location of investment: Certain VC firms operate solely in certain areas/countries
- Degree of support: Different VC partners oftentimes play varying roles in their portfolio companies. “Investor VCs” typically play a passive role in the company’s day-to-day operations, while “Operator VCs” typically play a more active role. Most Operator VCs are former entrepreneurs.
- Presence of Limited Partners: Most VC firms are funded by limited partners, who provide the funding to create such funds, but whose liability is legally limited. However, some VC firms are completely funded from the General Partners.
What VCs look for
While the judgement whether to invest in a startup is ultimately at the discretion of the partner involved, VC firms typically look for these key attributes:
- Capability of founding team
- Does the team have the experience, talent, and knowledge/skills to lead such a company? Do they experience as Entrepreneurs?
- Is the team cohesive, engaged, passionate, and adaptable?
- Potential of product or service
- What is the market size/potential?
- How differentiated is the product/process/price point/super niche?
- Is there revenue/profitability potential?
- What is the breakeven time?
- VC/Startup fit:
- Does the company align with our investment thesis/area of focus?
- Does VC firm have the appropriate resources to assist growth?
- Key Metrics of the business:
- What is the customer acquisition cost (CAC) and the customer lifetime value (CLV)?
- The Annual recurring revenue (ARR), Annual run rate revenue (ARRR)? Cash flow?
- What is the churn rate?
- Deal Structure:
- What deal is the VC getting out of this?
- What is the company pre-money/post-money valuation?
- Can the VC create a win-win scenario for all?