Venture Capital EXPLAINED

Alright, so in this video we're going to talk about venture capital. What it is, how you get started, what the relationships needed, and kind of just some nitty-gritty details, okay?

So Lincoln here is our resident expert in all this. Previously worked at actually at a venture fund though. Previously also worked at JP Morgan as well. So to give a little— to toot some horn over here, Lincoln knows what he's talking about when we're doing this.

Alright, so venture capital. You'll hear the term venture capital and then also angel investors. Now what's the difference between these 2? Essentially venture capital is you're investing other people's money into small businesses, and angel investing is you're investing your own money into small businesses, okay? So usually a little bit more of a group and kind of a formed entity, and then just kind of by yourself. So, but let's talk a little bit about the relationship between these small companies, right? So you're investing in seed companies, early, early stage companies. And there's kind of— when you look at a venture fund, there's 2 types of people that you'll see on the founding team, like as the general partners. So the first is an expert investor, right? This is somebody who has worked in the industry, like healthcare for 20 years, or worked in finance or something. You know, they've invested in businesses before, right? And the second type of person is an entrepreneur.

And a successful entrepreneur, I'll say with that. This entrepreneur has Already been on this side of the coin, probably company ABC Co. has built it and sold it and now has a lot of cash to play with inside of a venture capital fund and wants to go reinvest into new companies, the next generation of entrepreneurs.

Yep, so these 2 together kind of make a dynamic duo, right? And then there's you, right? If you're one of these people, great, you know, that's awesome, you're well on your way. If you're not, you have 2 different options. The first is to become one. And the second is to partner with one. So partnering is pretty self-explanatory, right? But becoming— like, yeah, you can become an entrepreneur, you can start a business, you probably have, but I mean, you're in this to start a venture capital firm, right? So let's talk about how you become an expert investor.

So when you first think of expert investor, you think of someone that has a Harvard MBA, JD/MBA, whatever, and they have done this for 30 years. You don't— it doesn't have to be the case. A lot of these— some of these funds, actually a great example is Harlem Capital, started— venture capital fund started with $25,000. They started— each member put in $5,000 each, that's all they had, and they started investing in very early stage seed companies.

Like a cafe, you know, a cafe and a super small boutique firm.

So by just starting though, by actually doing anything, By starting, you are now ahead of 95% of the other type of people in this space by doing just one deal or one transaction. My first fund was $49,000. It's nothing, but it's more than 95% of the other finance people in the world have done. It's $49,000 more to be exact. And so it actually, it builds you up here. One other example I want to give is a great guy I brought on my show. His name is Sam Yaffe. He started out of college with a venture capital fund. And he became this expert investor. The way he did it was the way he positioned himself. He said, hey, I'm young. I'm 23 years old. I know what consumers my age like to invest in. So bring me on as a partner. You guys are all 50 years old plus. You do not understand the difference between FaceTime and Zoom and a Google Voice call. Like, you just don't know, right? But I do, and so I could be a better advocate for these— you're trying to invest into a small, hip tech startup that's going to change how millennials do business. Hey, I'm a millennial, or I'm a Gen Z, bring me on your board. And that's how he leveraged himself into actually a very nice position at their fund and did very well.

So start thinking about that, right? The team dynamics there, like, that's the most crucial thing in a venture fund. So let's talk about the relationship between a venture capital firm and the companies they're investing in. Unlike private equity, where in private equity you are hands-on, you're You know, you're really injecting a ton of money into the business and you're flipping management, selling pieces. Venture capital is more of a passive role, right? Where you are investing money, you're still advising. It usually happens where you get a board seat, usually maybe 20% equity in a big round of funding is what the company's forfeiting in exchange for your expertise. So you gotta understand, when this company is looking for money, If it's a good company, you're not going to be the only VC firm that is trying to invest in them, right? Because all these VC firms raise the money and there's just this one deal that's really good, right? And that's when, you know, a deal like fundraising for a company could become oversubscribed. So you really need to make yourself unique, right? Like as a venture capital firm, like show that you're a good partner to work with. Mm-hmm.

A lot of these companies are gonna shop actually VCs. There's actually a lot of money out there.

Oh yeah.

And they're gonna do a good job of vetting you. They wanna make sure they're bringing on a strategic partner. Think about Shark Tank, right? Sometimes there's 2 sharks, they have similar offers, but the entrepreneur will choose one shark over the other because there's more than just money that that firm or person adds. A company's gonna do the same thing, especially in the venture capital space. What does your firm even— maybe there's other value add that you can provide besides just dollars. You can provide expertise or coaching or mentorship or other partnerships or other people. Those are things to consider with your relationship with the companies you're investing in.

Let's pivot a little bit and just talk about where venture capital fits into this space, okay? So you've seen this in some of our other videos, but this is kind of the life cycle of a business, okay? So you kind of have your growth stage, a mature stage of a company, and then maybe a distressed Stage. So the company is doing well, it's finally— usually kind of this mature stage is profitable, and then eventually companies die. And then right here is kind of like idea, right? It's like only a concept. So venture capital firms, they play in this space right here, okay? It's all very early stage. And the first dollars that a small company raise is usually referred to as seed funding. This comes from the 3 Fs we like to call, the friends, family, and fools, right? And then of course maybe angel investors or VCs. And then for each round of funding that a company raises, it's just, you know, a Series A, Series B, Series D, Series E. So as a venture firm, it's very common to have, you know, kind of an area of venture that you specialize in. So this would be late-stage venture. This is mid, and this is kind of early-stage venture capital. You kind of want to stay in those sectors because they each have different characteristics. An early-stage venture firm, seed and A, it's a lot riskier typically. But with that comes a lot potential higher reward. Then late-stage venture usually is a little safer, but once the company's had this much, received all this funding, they're They're usually grown quite a bit and substantial. They haven't quite hit profitability yet, so they just need a little bit more money. But obviously your equity positions aren't gonna be as large in a late-stage venture firm, so not quite as good of returns. So, but you kind of need to be targeting where you're gonna fit into that.

So in addition to a category, maybe you're a Series A type of venture capital firm, a lot of VC firms will specialize in an industry As well. So some firms, the most common would you say like it's tech, right? Silicon Valley Tech, Sequoia Capital, right? They're going to invest into these types of funds. There's actually a lot of VC funds that will do stuff outside of tech or a special version of tech. Maybe it's tech in healthcare.

Fintech.

Or fintech or telehealth, or maybe you want to go to emerging markets. Maybe you like to invest in third world countries or developing countries because you see that there's this emerging market that's going to take off. And it's almost like seed plus compounding growth inside of an emerging market.

Perfect, I'm glad you mentioned that, Bridger. Now additionally, the big thing you need to think about as a venture capital firm is not only how you're gonna buy these companies, but how are you gonna exit, right? How are you gonna get out of your positions?

So on this lifecycle, there's a few exits that could happen inside of here. Number one, the most common you always see is the IPO, right? Initial public offering, right here at the mature stage. The company will go public and they'll sell. We just had, I think we saw DoorDash and Snapchat, some other big—

Airbnb.

Yeah, some huge VC-backed companies that finally IPO'd, and all of these venture funds now have their big payday, right? They get all paid off and they made huge returns. That's number 1. Number 2 would be that they sell to a large private equity firm or potentially another venture capital partner. So some VC funds They get in at Series A and they get out at Series D or C, right? That's still an exit that they can put up their shares, and that's the only— they like to go from A to C, that's it. They're hoping the company needs more future rounds of funding because that gives them exit opportunities, or maybe they're not coming from VC but a full-out, instead of an IPO, a big private company is going to come and gobble up and buy all the shares.

Or even a public one, right? Acquisitions are so common today, right? These large mass behemoth entities just acquire several companies a year, right? And you maybe one of these smaller ones is poised for an acquisition. So typically in venture capital, you want to have like a five-year exit plan, right? Like what? How am I going to get out of this deal, and how am I going to return money to investors, right? The I mean the life of a venture capital fund is probably anywhere between eight to twelve years. Now you can file extensions on that, right? So at one of the firms venture funds my buddy works at, like. One of their companies ended up going IPO, and it was like right as they were getting ready to file was year 10 when their fund, and they were supposed to liquidate, but they filed extension with their shareholders and extended the life of the fund 2 years, and it obviously increased the value of those shares exponentially. So that's venture capital in kind of a wrap. We'll go in other videos, we'll go more in depth on, you know, how to look at deals and market positioning and term sheet and things of that nature.