{"id":18331,"date":"2020-08-05T23:28:12","date_gmt":"2020-08-05T22:28:12","guid":{"rendered":"https:\/\/seedlegals.com\/resources\/are-you-ready-for-vc-funding\/"},"modified":"2020-08-05T23:28:12","modified_gmt":"2020-08-05T22:28:12","slug":"are-you-ready-for-vc-funding","status":"publish","type":"post","link":"https:\/\/seedlegals.com\/ie\/resources\/are-you-ready-for-vc-funding\/","title":{"rendered":"Are you ready for VC funding?"},"content":{"rendered":"

You\u2019re a founder who has raised a couple of hundred thousand from friends, angels and\/or a seed fund. You’ve released your first product and now it’s time to scale. Cash is often the answer to scaling fast. Raising money from a VC seems the next step to accelerate. But is it? This article discusses whether VC funding, typically associated with a late Seed or Series A round, is right for you.\u00a0<\/span><\/p>\n

Since the mid-2000s, the emergence of VC-fuelled, high-profile, tech monoliths such as Facebook, Twitter, Uber, etc., who have grown huge very quickly have given the feat of raising money from a VC firm more glamour and prestige than ever before.\u00a0<\/span><\/p>\n

And it <\/span>is <\/span>a big feat to raise money from a VC. It\u2019s a huge dedication of time, effort and money which detracts you from running your business. But, done right, of course the significant capital raised from a VC could be vital to your progression as a business. But don\u2019t think it is necessarily the be-all and end-all for your company to become successful. <\/span><\/p>\n

So, ask yourself this question, is VC money right for you?<\/strong><\/p>\n

The answer to that depends on two things:<\/span><\/p>\n

    \n
  1. Whether VC money is right for <\/span>your company<\/span>.<\/span><\/li>\n
  2. Whether taking VC money is right for you personally.<\/span><\/li>\n<\/ol>\n

    Is your company right for VC funding?<\/b><\/span><\/h3>\n

    To answer this it’s <\/span>vital<\/span> to understand what a VC expects from investing in your business, which is ultimately tied to how a VC\u2019s business model works.\u00a0<\/span><\/p>\n

    By investing in your company, the VC needs your business to:<\/span><\/p>\n

      \n
    1. grow<\/span><\/li>\n
    2. grow very<\/em> fast, and<\/li>\n
    3. exit (be sold) or ultimately provide liquidity (e.g. via IPO) to the VC within around 5 years from the time they invest.<\/span><\/li>\n<\/ol>\n

      Why is this?<\/span><\/p>\n

      VCs want, or more aptly <\/span>need<\/span><\/i>, the above to happen because they sell <\/strong>their <\/i><\/strong>investors the <\/strong>promise of a high and relatively fast return<\/strong><\/span>. VCs have to fundraise too!<\/strong> <\/span><\/p>\n

      The typical VC fund model aims to return around 3x cash invested over a period of 10 years. That targeted return is not governed solely by how much cash is given back to investors but more importantly <\/span>how quickly the cash is given back to investors<\/span>. A 3x return over 10 years is the equivalent of a 12% interest rate – it’s a high rate to achieve but then the risk of investing in venture businesses is like no other.\u00a0<\/span><\/p>\n

      It is this target return that follows on to the crucial thing the VC needs to see in your business, and that is your business\u2019 potential to <\/span>return the fund<\/b>. This is an industry term in VC which essentially means the VC\u2019s investment in your business alone<\/em> has the potential to give them the desired exit proceeds for their entire fund. Not only does this give the VC a great return for their investors, but it also makes the VC <\/span>very <\/span><\/i>wealthy as they share in the profits they make for their investors if they beat that effective 12% interest rate mentioned above (this interest rate is known as the \u2018hurdle\u2019, and if the VC beats that the profit they get is called \u2018carried interest\u2019 or \u2018carry\u2019).<\/span><\/p>\n

      If you\u2019re speaking to a VC, ask what the size is of the current fund that could invest in your company and how many companies they are looking to invest in from that fund. <\/span><\/p>\n

      Let\u2019s say the fund size is \u00a3100m, here’s the maths:<\/strong><\/p>\n