There’s reams of material focused on investment avenues for organizations in the world today, and Venture Capital is one of them that’s hot in the circuit. Every startup or early stage organization aims to achieve sale and scale to catch the eye of a funding agency to propel their growth objectives with an infusion of equity capital. So let’s try and take a step back to define what Venture Capital is all about.
Venture Capital is a form of finance that investors offer to start ups and small-scale businesses if they see growth potential in them. It’s mostly investors looking to diversify their portfolio or investment banks and institutions. Venture capital is allocated to companies that have the potential to expand in the long term. This type of financing isn’t necessarily in monetary terms; it can be in the form of expertise in technology etc.
Basically in a venture capital deal, shares of ownership in a company are made and sold to a few investors through venture capital firms. These firms establish independent limited partnerships with these investors. Venture capital deals are more focused towards companies trying to establish and expand themselves by seeking investment, where as other private equity deals are more focused towards companies that already have made a name in the market and are looking for investors to own some shares.
Success stories:
Some of the most famous success stories include Uber, Snapchat and Instagram; three of the popular applications people use worldwide. Uber, a cab service application, raised about $1.5 billion from venture capital funding. First the company raised $1.2 billion from a group of mutual fund managers and investors and then they raised $258 million from Google Ventures. Evan Spiegel, Bobby Murphy and Reggie Brown created Snapchat, an application famous for sharing photos. They managed to raise half a million initially and then $60million through ventures capitalists. Overall, Snapchat had raised about more than $1.4billion by February 2015.
Another success story is about WhatsApp. Facebook acquiring WhatsApp for a whopping $22 billion in 2014 still remains the largest private acquisition by a Venture Capital backed company. Sequoia Capital was the company’s only investor and they turned a $60 million investment to a staggering $60 million. Sequoia was successful because of their partnership with the WhatsApp founders. Usually, investors ask other investors too when investing in a startup, just to be safe and bring more buzz around that company. With WhatsApp, Sequoia Capital took a different turn and became the sole investor when the company was valued at $78.4 million. Outside of having a venture capital deal, WhatsApp only raised $60 million.
In 1999, Google raised around $12.5M each from Kleiner Perkins Caufield & Byers and Sequoia Capital. In 2004 Google had an IPO and then after a year its investors had more than $4.3 billion stake in the company.
There have been many other successful deals too. Ant Financial, which is a chinese company that spunoff from Alibaba, raised about estimated $150 billion and made history in the Venture Capital deals because of its multibillion-dollar round. The investors were Warburg Pincus, GIC, Silver Lake and Temasek.
Altria acquired Juul for $12.8 billion and some other investors were Darsana Capital Partners, Fidelity investments and Tiger global. Twitter’s IPO raised $1.8 billion in 2013 and that valued the company at almost $14.2 billion. Union Square Venture invested and their share of twitter was valued at $863 million. USV were the first ones to invest and beat other Venture Capitals like CRV, Kleiner Perkins, Benchmark, Insight Venture Partners who invested in the business later.
Venture Capitalists always look for various success parameters in their targets and more than often startups and organizations try to project growth from the investor lens. The astronomical value of capital raised and publicized by the venture investors for these aforementioned entities across multiple rounds tend to serve as a propellant for companies to grow in the direction of the investment firms rather than in the direction of their customer. However startups and early organization that chase the funding mirage need to always be aware that investment follows growth, and once they aspire to put this in order, everything else including the investment would follow suit.