Venture Capital: A Brief Introduction

Venture Capital: A Brief Introduction

  1. Definition: Venture capital is a form of private equity financing provided by investors to startups and small businesses with long-term growth potential.
  2. Purpose: To provide funding for high-risk, high-reward ventures.
  3. Key Players: Venture capital firms, angel investors, startups, limited partners (LPs).

__________________________________________________________________________________

History & Evolution

The origins of venture capital (VC) trace back to the mid-20th century, particularly in the United States, evolving out of a need to fund high-risk, high-reward innovation that traditional banks avoided. 

First VC Firm – American Research and Development Corporation (ARDC) (1946)

  1. Founder: Georges Doriot, a Harvard Business School professor and WWII general.
  2. Goal: Fund startups commercializing technologies developed during WWII.
  3. Famous Investment: Digital Equipment Corporation (DEC) – invested $70,000 in 1957; worth over $355 million at IPO.

__________________________________________________________________________________

Growth Phases

  • 1950s–1970s: Birth and early development.
  • 1980s–1990s: Boom in Silicon Valley.
  • 2000s–Present: Global expansion, sector diversification, tech dominance.

Key Hubs

  • United States (Silicon Valley, New York)
  • China (Beijing, Shenzhen)
  • Europe (London, Berlin)
  • India, Israel, Southeast Asia, Africa

________________________________________________________________________________________________

How Venture Capital Works

1. Fund Structure

Limited Partnership: General Partners (GPs) manage funds; Limited Partners (LPs) provide capital.
Fund Life Cycle: Usually 10 years (with possible extensions).

2. Stages of Investment

Seed Stage: Idea/prototype phase.
Early Stage: Product development, initial traction.
Growth/Expansion Stage: Scaling the business.
Late Stage/Pre-IPO: Preparing for exit via IPO or acquisition.

3. Investment Process

  • Sourcing Deals
  • Due Diligence
  • Term Sheet Negotiation
  • Funding and Ownership Stake
  • Board Involvement and Mentorship
  • Exit Planning

____________________________________________________________________________________________________

Key Terms and Concepts

  • Valuation: Pre-money and post-money.
  • Equity vs Convertible Notes vs SAFEs.
  • Term Sheet Components:
  • Valuation
  • Equity stake
  • Liquidation preference
  • Anti-dilution provisions
  • Board structure
  • Cap Table (Capitalization Table)

_____________________________________________________________________________________________________

Types of Venture Capital Investors

  • Angel Investors
  • Venture Capital Firms
  • Corporate Venture Capital
  • Accelerators and Incubators
  • Family Offices and High-Net-Worth Individuals

_____________________________________________________________________________________________________

Back to blog