The involvement and financing of startups in San Francisco include both private venture capital and public equity. In general, the role of venture capitalists is to provide a third party cash injection to an accelerator-led or private company in exchange for shares of the company’s equity. Venture capitalists can also participate indirectly through the equity of the company. Most angel investors are wealthy individuals with successful business experiences. An additional funding source could be either a personal connection within the company (especially if there is a management team already), or the traditional route of bank loans, venture capital financing and/or private placement with a large investment firm.
As an advisor to startup companies seeking capital, I advocate using a combination of sources to achieve the greatest potential for success. While it is possible to obtain venture capitalists on a need-to-know basis through Angel Investors and the traditional finance world, most venture capitalists do not typically provide seed capital unless there are other significant personal and business assets supporting the venture. Therefore, I recommend that my clients avoid relying solely on Angel Investors or venture capitalists for the initial seed rounds. In my experience, most private financing rounds require a more intensive due diligence process for the investor, including a review of the business plan, a due diligence meeting with management to discuss the venture in person, a conversation with financial advisors to discuss the company’s financial situation and a final evaluation of the business’s unique business opportunity.
Another potential source of venture capital is investment companies. Investment companies generally provide greater financing levels than angel investors as they have more sophisticated needs and an established track record of investment success. In my experience however, investment companies are not a good source of seed capital unless the founders have a strong business plan and management team in place. These companies usually require more negotiations and due diligence with respect to the valuation of the company before providing capital. Additionally, an investment company’s reputation can suffer from poor performance, which could result in the loss of business and investor confidence.
Private Seed Companies. This is often the fastest way to receive seed financing as companies that are seeking capital often have a significant history of success and are looking for a partner to accelerate growth. The downside to Seed Capital is typically higher risk. Moreover, there is typically not enough capital to put together to make a successful startup companies go public, which again raises the question of whether an outside investor is better served by committing resources to such a large scale investment.
Public Involvement and Financing of Startups. Public interest in the success of startups has increased dramatically in recent years. A number of prominent entrepreneurs and venture capital firms have entered the fold, seeking to impact the future of technology. Unfortunately, the benefits of increased public awareness have come at the cost of increased competition among new and existing startups. Because of this, many new companies struggle to obtain the resources they need in order to launch a successful business. Consequently, public funding of startups is often times used as a last-ditch effort.
Private Funding. Unlike Seed Capital, a private investment rarely seeks to secure the future of a company. Instead, startup companies often receive money from a personal source or by obtaining equity from a venture capital firm. Since most private investors have limited experience in the venture capital field, it is rare that private sources will provide significant seed money for new ventures.
Seed Capital. seed Capital is designed to help companies in their earliest stages of development. Most venture capital firms seek to partner with well-established companies that have a history of success. As a result, it is often times quite difficult to obtain seed capital for companies seeking funding. Venture capitalists typically take a high risk considering the fact that these companies have not necessarily proven themselves as a viable investment vehicle.
The involvement and financing of startups remain a dynamic and exciting area of the economic landscape. In the last several years there have been a number of exciting new trends emerging that are rapidly changing the face of the venture capital market. While no one method is perfect, there are multiple methods that provide promising results for startups and are consistent with high returns on investment. With an emphasis on using realistic business models and aggressive growth strategies, there are many reasons why startups may find venture capital as one of the best available options to increase their chances for success.