The value of VC, beyond their investment
A basic breakdown of Venture Capital (VC) looks like this:
1 - Raise: A VC firm raises a fund.
2- Invest: The VC firm identifies and invests this fund across a variety of promising startups.
3 - Return: The VC firm hopefully see's one of their investments succeed and thus then reaps the return.
It's a numbers game, (here is a deck I was once sent that walks through the process).
While the VC model seems to boil down to simple math, VCs can be much more than their money. VCs don't just invest, they also often offer guidance, expertise, and connections.
This chart sums up how VCs should ideally spend their time, cc Harvard Business Review:
For an even more simplistic understanding of this, let's roll it up like this:
30% sourcing, investing, & exiting
70% involved
With 70% involvement in their investment, it would appear that VCs play an active role in determining the outcome of their investments and they would be prudent to do so. Venture Capital firms that take a hands on approach, known as an operator model, often see above a 20% IRR (internal rate of return).
This is why most entrepreneurs would die to be backed by Sequoia Capital (known for Airbnb ) or Andreessen Horowitz (known for Twitter), not because of their capital, but because of their guidance.
But what does this guidance actually look like in practice, especially if VCs need to invest in many startups to better secure a return on their investment?
Until next time ✌️