Raising capital from venture capitalist can result in conflicts of interest. Since venture capital firms are in the business of investing, they often advise or control more than one company at a time. In such condition, the regulators are likely to look at whether the VC is complying with its fiduciary duty to act in the best interest of each company. Although it is difficult to identify all areas where venture capitalists may face a conflict of interest, here are some of the most common scenarios.
Normally, a conflict of interest arises between the fund’s investors who want to limit the funds to make sure that the capital raised is used well and a fund manager that want to maximise the fund to increase the management fees created by the fund.
A fund manager should allocate broken deal expenses and transaction expenses between the fund manager, the fund, and co-investors by reasonable investor expectations and the fund’s limited partnership agreement.
Conflict of interest is also likely to occur in co-investment scenario. This situation occurs when individual investors in the fund and the fund manager have the opportunity to independently invest in one of the fund’s portfolio companies. In case the terms under which the investors and fund managers differ from the terms under which the funds invest, a conflict of interest may arise during the negotiation of the fund’s investment.
References https://www.strictlybusinesslawblog.com/2017/05/24/managing-conflicts-interest-private-equity-venture-capital-funds/ http://fortune.com/2011/09/08/venture-capitals-conflicts-of-interest/
In the worlds of investment and finance, the venture capital industry plays an important role and is often the means by which many careers are built. Typically, venture capitalists invest a large amount of money in start-ups. Therefore, due diligence and extensive research into the start-up background is essential.
Most venture capitalist begins their day reading daily publications. They focus on publications that provide information on possible leads for investment, on trends on marketable goods, and on new companies. The rest of the VCs’ morning is filled with phone calls and meetings. In general, venture capitalist meets with other partners and members of their firm to discuss the day’s focus, potential portfolio investments, and companies that need further research.
Most Venture capitalists connect with their current portfolio companies in the afternoon. This is important for determining how well a company is operating and if the funds of venture capitalists are utilized wisely. A venture capitalist may take some members of the company out to lunch and carry out such meeting over the meal.
A VC does not necessarily have an eight-hour workday. After meeting partners and members of the current portfolio companies, the venture capitalist may decide to have an early dinner meeting with entrepreneurs appealing to the firm for funding. The VC gets a sense of the company’s potential for success during this meeting. The venture capitalist also takes notes during this meeting. These notes are presented to the firm during the morning meeting the following day.
References https://www.investopedia.com/articles/professionals/120215/day-life-venture-capitalist.asp https://blog.creandum.com/a-day-in-the-life-of-a-venture-capitalist-is-this-you-cc92f2c0993f
For expansion-stage or growing start-up companies, getting venture capital funding should be cause for celebration. High five should ensue, and every stakeholder should be happy because of venture capital scale and drive future growth. Unfortunately, many start-ups fail after raising venture capital. Today we will look at three reasons why such start-ups fail.
Company product only appeal to early adopters
Many company products aren’t a must-have in the long-run. A lot of trendy software start-ups make good products appeal to early adopters. They are only good enough in the first few days. If customers can live without your product, there is no point of trying to grow bigger using outside capital.
Unsustainable business model
It is not unusual for unprofitable businesses to get significant capital funding that allows them to run unprofitably for a long period. Although unprofitability may not be necessarily an issue in the early growth or start-up companies, lacking profitable economic model is a big problem. If you sell more of unprofitable products, you’ll be more unprofitable.
Management team is inept
Bad management can cause a business to fail. If you have not assembled a competent senior management team for your company, then the business is doomed. No amount of capital venture funding can rectify the failings of a senior management team.
References https://scalefinance.com/scale-fail-5-reasons-companies-fail-after-raising-venture-capital/ https://s3-us-west-2.amazonaws.com/cbi-content/research-reports/The-20-Reasons-Startups-Fail.pdf
Today, many companies run on their intellectual property strength. Also known as IPs, intellectual property includes trademarks, patents, copyrights, and trade secrets. When managed properly, IPs can generate a high level of returns and profits for their owners.
IP is a valuable commodity which can help differentiate a company from its competitors, drive value creation, draw in new customers and motivate M&A activity. When protected and cultivated, IP is one of the most significant tools at an organization’s disposal.
Venture capitalists are particularly interested in deals driven by the desire to invest in or acquire valuable IP assets. The largest sectors for venture capital firms in the recent years have been life science, communications, and consumer electronics. The pace of technological change in these fields has been impressive, and venture capitalists have zeroed in.
According to Ylan Steiner, a partner at King & Wood Mallesons, historically IP has rarely been the main driver for VC transactions. Despite many venture capitalists’ previous reluctance to prioritize intellectual property, times are changing. However, it is not enough for the venture capital firms to complete a deal; they need to understand the advantages of IP assets. They need to know why certain IP is important to a particular industry or firm.
References https://www.financierworldwide.com/venture-capital-and-ip-assets/#.WejYc_mCzIV https://www.forbes.com/sites/maryjuetten/2015/08/11/do-venture-capitalists-care-about-intellectual-property/#7136b9c85b87
While entrepreneurs looking for funds should be aware that venture capital is hard to get, the number of deals closed is declining. Here are factors that are shaping the venture capital industry and are likely to impact investments in the future.
VC funds raised a lot of money in 2016
One development that accounts for the recent drop in venture capital activity is the degree to which venture capitalists fundraised last year. They raised $41.6b cross 253 funds. This indicates that investors may become more active in the future.
Investors are more likely to invest in frontier tech
Virtual and augmented realities, artificial intelligence, the internet of things, drones, fintech, and 3-D printing technologies have been hot topics for years. It takes time to learn the new technologies, meaning that investors have been taking longer to close deals with startups in these new sectors.
Many VCs have not been able to cash out
While late-stage, early-stage and angel/seed activity declined last year, so did the exits. Whereas interest in new investment opportunities and last year fundraising might increase earlier stage activity, the late stages of venture capital life cycle are still backed up. A sluggish exit market is keeping more funds locked away than ever before.
References https://www.entrepreneur.com/article/287766 Inside the Q2 2017 global venture capital ecosystem
For a majority of start-ups, acquiring venture capital is an essential tool in making a business stand on its own feet. Without obtaining the best advice from the experts on venture capital, raising it can be an uphill task for a new entrepreneur. The following are the best five venture capital experts that you should not only know but also follow on twitter:
Chris is an alumnus of Penn State University. Last year alone, he authored over two hundred top-notch articles on venture capital. His expertise in this area of business is simply impressive. Following him on twitter will give you a great opportunity of learning from the expert.
Being a journalist that focuses on the investment aspect of the business, Iris has published over seven hundred articles on venture capital. A majority of her articles are a must-read for every entrepreneur.
Angela is a former employee of Thomson Reuters, a place she worked as a journalist. Currently, she works for Reuters Buyouts. Her main focus is writing insightful articles on venture capital. Most of her articles on venture capital have each generated more than 1500 shares.
Michael is one of the most influential people in the investment industry. His stories on venture capital are very informative and, therefore, worth reading. His articles are focused on making the reader make investment decisions that guarantee success.
Raising capital for a business can be an uphill task. It does not matter whether the financial markets that you are exposed to are liquid or not. Without a plan or strategy, raising venture capital is almost impossible. The following three common misconceptions entrepreneurs have when trying to raise capital for their businesses:
Most capital is generated when the company is at the start-up stage
Most investors prefer companies whose business is growing or has grown. A company that is already in the market and has high prospects of success is attractive to investors than startup whose future is unknown.
Taking corporate venture funds indicates your company will be bought
A common misconception amongst entrepreneurs is that when a company invests in your company, there are higher chances of the investor company taking over your company. It is important to note that that rarely happens. In fact, corporate venture capital is one of the best ways of raising capital.
Venture capitalists are only focused on the exit strategies
Most entrepreneurs believe venture capitalists are only focused on the exit strategies. However, many venture capitalists want to be part and parcel of your business. They know that as the business grows, the return on their investment also grows.