Can be seed, early or later stage; Always involves longer-term, illiquid equity investment in a company believed to have superb growth prospects; brings capital to the company, typically in the form of convertible preferred equity and perhaps (not significant, subordinated) debt, as well as financial, market, management, “plan execution” and other expertise and discipline
Investors include “VC” firms (typically organized as limited partnership funds, which raise money from large institutional investors and very wealthy individuals), investment companies, investment funds, pension funds, insurance companies and wealthy individuals (sometimes called “Angels”); targeted investment returns of 10X or more, so you better be prepared to go BIG!
Given risk and lack of immediate liquidity (or exit strategy), typically involves thorough due diligence, intensive financial projection and business planning work and aggressive negotiation; operating and control issues must be addressed
Pros:
- VCs can invest large sums at once and they can provide expertise and other assistance that is helpful in growing and exiting your business.
- Being VC funded brings instant credibility to your company.
- VCs open up doors to a vast network of individuals including partners and future investors.
Cons:
- The term “Vulture Capitalist” exists for a reason. VCs are about the money and will take necessary steps to see a return on their investment, including ousting you from your own company.
- VCs may steer the business in a direction that you don’t agree with. However, they are very experienced and may know something that you don’t.