In this article, we are going to talk about a key financing option for entrepreneurs: Venture Capital (VC). Do you know what it is? Read this article to learn more about this topic!
Venture Capital is one of the most common form of alternative finance.Let’s discover what it is and how it works.
- Definition of Venture Capital
- How Does it Work?
- VC Investment Criteria
- Why Should a VC Finance a Start-up Project?
- Venture Capital Funds in Italy
Definition of Venture Capital
Venture Capital is a a type of private equity financing that investors provide to startups, early-stage and emerging companies that have a growth potential in the long term. It is a form of high risk investment because it is mainly oriented to finance innovative startups.
Innovation and invention are the basis of a project, but they are not enough for a startup to take shape. The transition from the conception of a project to its physical realization is made possible by capital investments.
For startups, finding the funds to finance the innovative idea is perhaps the biggest obstacle. While already existing companies can rely on internal capital in order to finance a new project, a new company has to find external forms of funding.
VCs are high-risk investments, because startups are companies with a high failure rate but, when they succeed, guarantee their investors a return so high that they also pay back what they have lost in failed companies.
Therefore, startups usually turn to this type of funding in order to carry out their projects. Those who found or manage a Venture Capital fund are called venture capitalists.
How Does it Work?
The first step for any startup looking for venture capital is to submit a business plan which determines a specific target for the capital collection. The fund achieves the goal when it receives a formal commitment from all its subscribers to provide the required funds.
Once the capital is reached, Venture Capital can start operating on the basis of three different investment focuses: it will be able to move based on the state of life of the startup, or with respect to certain sectors of interest, or to the minimum or maximum amount of capital that can be provided per individual deal.
If interested in the proposal, the firm or the investor must then perform due diligence to evaluate a potential investment opportunity. Due diligence is a rigorous process that determines whether or not the venture capital fund or other investor will invest in your company. It includes an investigation of the company’s business model, products, management and operating history.
After that, the firm or the investor will guarantee an investment of capital in exchange for equity in the company. They also takes an active role in the funded company, advising and monitoring its progress before releasing additional funds.
In conclusion, the investor exits the company after a period of time, typically four to six years after the initial investment, by initiating a merger, acquisition or initial public offering (IPO).
VC Investment Criteria
Venture capitalists should follow some criteria before making any investment. Some significant venture capital investment criteria are as follows:
- More risk more returns: investment in risky ventures can get higher returns if the ventures are selected carefully.
- Company’s profile: the company should be a fast-growing company with a huge market presence and it should be able to stop its competitor’s growth.
- The business model: the products sold by the company must have a high market demand and the company should be able to generate more revenues with limited resources.
- Management team: it should have skilled, realistic, honest and seasoned group of people who have the capability to turn plans into reality.
- Company’s Valuation: the market valuation of the company in term of investments and equity should be attractive because a good valuation reduces the risks involved in the investment.
- The Exit Plan: venture capitalists should have a proper “exit plan” to opt out of investment.
Why Should a VC Finance a Start-up Project?
Generally, when a venture capital invests in a start up, it acquires company shares. Very often it also requires to play important roles in the company’s management.
In some cases, it could make its know-how available to the nascent company. In other cases, the gain of venture capital could be requested all together once the company has grown considerably and only then could it claim its “exit”.
What usually strikes and convinces a VC is the solidity and skills of the team that present the idea. Even the target market plays a crucial role.
The product or service must have very broad targets and bring a greater added value to the end customer, compared to that offered by competitors.
Venture Capital Funds in Italy
In Italy, there are several venture capital funds. Some of these are:
- Five Seasons Ventures
- Innogest Sgr
- Fondo italiano d’investimento SGR
- Invitalia Ventures
- Primomiglio Sgr
- 360 Capital
Five Season Ventures
PORTFOLIO NEWS: we are super excited to be investors in @JustSpices backing Florian, Ole, Bela and the team reinventing one of the oldest product categories in the world: spices. Innovation is the new chili pepper. https://t.co/GpKEl0bqlo pic.twitter.com/p6R27dus5b— Five Seasons Ventures (@FiveSeasonsVC) January 10, 2020
Five Seasons Ventures is a Paris-based venture capital firm which focuses on innovative companies in the food and agriculture supply chain.
The firm invests in entrepreneurs with international ambitions and companies with high growth potential. It invests €2-4 million as first investment and it can invest up to €12 million in each company.
Innogest Sgr is made of investors that have passion in creating, financing and supporting the growth of new ventures in the digital and tech area.
They work with entrepreneurs to attract great people and to assist them to transform inspiring projects into global successful businesses. In over a decade, they have invested in 26 tech companies that has raised over €100 million.
Dalla Convention Annuale #Azimut, i risultati e le novità per il #2020, come il nuovo Fondo #Italia500 creato in collaborazione con #P101. Il primo fondo di #VentureCapital creato per il mondo retail.#investimenti #startup #pmi pic.twitter.com/tTgw3u3kiK— P101 (@P101Ventures) January 10, 2020
P101 is a venture capital firm that is focused on early-stage investments in the digital sector. It supports new entrepreneurs who are committed to developing and strengthening their companies.
The firm focuses on early stage investments and provides financial resources, following the development of the supported companies. Its investment is usually between €1 million and €10 million.
Fondo Italiano d’Investimento SGR
Fondo Italiano d’Investimento SGR S.p.A is a venture capital firm supporting the innovation and the competitiveness of the italian industrial system.
Today, it manages seven closed-end funds, reserved for qualified investors, for a total target asset under management equal to about €2,3 billions.
Un calorosissimo benvenuto al team di Rocco Lomazzi nel network di investimenti di Invitalia Ventures! Il round da 8 milioni di Sweetguest, la startup per chi affitta su Airbnb https://t.co/SB0mtyIKnU— Invitalia Ventures (@In_Ventures) April 30, 2019
Invitalia is the National Agency for Inward Investment and Economic Development owned by the Italian Ministry of Economy.
As for startups, Smart&Start Italy is the instrument that supports the creation and growth of innovative startups all over Italy. It has a total budget of around €200 million and funds projects costing up to €1.5 million.
🗣 Primomiglio inaugura la sede laziale e investe in VIS!— Barcamper (@ilbarcamper) November 11, 2019
VIS, #startup che ha sviluppato una piattaforma per il welfare, ha chiuso un round da 1M sottoscritto da #BarcamperVenturesLazio, il nuovo fondo gestito da #Primomiglio.https://t.co/R1oyrCfNNM pic.twitter.com/jJ4v6nsTKO
It invests from 25,000 euros, up to 3 million euros in a single startup, in the case of the acceleration program.
Great outcome for a fantastic brand/product, in particular, staying in New Zealand!https://t.co/TXN3rO9URU— Three Sixty Capital (@360Capital) November 29, 2019
360 Capital is a Venture Capital firm investing in innovative deep-tech & digital enterprises across Europe.
It helps tech pioneers and innovators to build outstanding companies, investing from €100.000 to €10 million in early and growth stages.
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