hey everyone my name is kenji and in this video i want to explain what venture capital is so all
these companies here at some point in their life were funded by venture capital so let's start with
a basic definition so simply put venture capital is money that's provided by investors to startups
and in exchange that startup is going to give the investor a certain portion of their company
so that vc or that investor if you will hopes that the startup is going to grow and so that stick
that they had is going to be a lot more in the future so that's a basic definition and let's get
into the details there's really four main parts i want to cover the first one has to do with the
venture capital structure who its clients are for instance secondly we look at the funding rounds
the different points in which they can invest money thirdly we'll talk about the investing
strategies what kind of companies they seek and then fourthly we'll talk about some of the exit
strategies or how they cash out so let's start with the vc structure and the general dynamics
so on the one hand you have the clients so these are people that invest the money in the vc fund
and these might include large institutions like pension funds mutual funds insurance companies
and others then in turn they expect the vc to give them positive returns right now once the vc has
the money it's got to find the returns right so they invest in a startup and in exchange for the
money the startup is going to give them a stake in the company so basically they sell them a small
portion of the startup i also want to add that the relationship between a vc and startup is not
purely financial it's it's a close relationship in which the vc often gives them advice it gives them
some help with recruiting for instance and other things like that so they're in close contact
but because startups are risky they actually got to invest in many different ones so you may have
also heard of the term called angel investor that's basically the same thing as vc the only
difference is an angel investor typically invests his own money while a vc invests other people's
money so as for how long these funds last it's typically seven to ten years depending and so
the first couple of years they're actually going to be looking at investing the money
then throughout the middle periods they're hoping that it's going to grow and then towards the end
they're gonna try to liquidate and cash out their positions and then once that whole cycle is done
the vc if it's been successful it might raise another round of money and do the whole thing
again so now that we understand more or less the dynamics of a vc let's look at their different
funding rounds so the different moments in which they decide to invest before that let's first look
at the life cycle of a company so it typically begins with just an idea the classic example is
steve jobs and wozniak back in their garage for instance and then from there it starts to grow
right this is the growth stage and typically the companies are not that well known yet
once after that it hits the maturity stage and that's maybe for instance nike these days and
then after that we'll get into what's called the decline stage an example maybe a bit controversial
could be general motors so where does the vc come into the picture they typically come around the
idea in the growth phase now within that idea and growth phase there's multiple periods in
which they can invest in so here's some of the main ones so first one's seed funding and this
is basically the earliest asian company when it's basically just an idea after that there's a series
a so this is when there's a lot of growth and the company is generally projected to do very well
next up is serious b and typically that's when they're actually starting to make money
revenue in this case not profit so they're generating a lot of sales say then after that
you might have a series c where they're looking to expand say expand internationally for instance
then there's series these e's etc but to be honest once you're at that stage you're definitely a
successful company you're doing very well you may not be making profit but you're still doing very
well and you have high prospects but to be honest unfortunately most companies don't even get to
that stage typically a startup might be able to get a seed round and by series a it's probably
going to to go bankrupt just because they're not going to be able to raise enough money and not
enough people are going to believe in the product so it's definitely a very very cut throat industry
so now that we understand the funding rounds let's look into the types of startups that they look for
so generally speaking there's three main traits the first one has to do with it being a large
market so basically whatever target market the startup has has to be big enough for them to grow
right if there's not much money to be made in the market then what's the point the second one has
to do with having outstanding people so making a startup is obviously extremely difficult the odds
are definitely against you and so you want to have the best group of people possible and then lastly
you have having a quality product or service so if you have an outstanding product or service
essentially sooner or later that's gonna do well so that theory is great it doesn't take a genius
to figure that one out so let's look into what they actually look like in real life because
it's not so simple so firstly they're typically startups that lose money if they were making money
then they probably wouldn't need to sell part of their company to a vc right so that's number one
number two they typically tend to be growing at say something like 50 to 100 percent so there
whether it be their sales or the number of users are growing hugely exponentially and then lastly
their business on the whole is a scalable one so for instance a non-scalable business would
be a restaurant say where every time you want to grow you need to create a new restaurant and
so that might take years to to buy the site to reconstruct etc whilst a scalable business could
be something like a social media site where all you need to grow with is one person to sign up and
they maybe take 10 seconds to sign up right so it's easily scalable and you can see why vc's
tend towards the tech side just because the products itself are very easy to scale right
and to be honest most startups fail it's something like over 70 percent i think fail and so that
means that for a vc they need to invest in tons of them and more or less for them it's about 9 out of
10 that fail or don't do as well as they expected and that one out of 10 is the one that's gonna be
pulling for all the other nine losers in a way and so it's a bit of a high risk and potentially high
reward game here so the irony here is that even if most investments end in a failure
one or two good ones can actually make or break your fund that's essentially what gives you the
reputation so for instance if you invested in google or facebook in their early years
that reputation and that notoriety stays with you throughout right so here's some examples of
the most famous vcs the first one and probably the most prestigious one out there is sequoia
capital these guys have been around since 1972 and some of their biggest investments include apple
google and dropbox so really companies that today are at the forefront of technology
another big one is andros and horowitz and they're actually fairly new they were founded in 2009
and among their biggest investments include skype twitter or airbnb now both of these i've
mentioned are fairly large so they invest in all sorts of businesses but overall there's some very
specific ones so for instance some vcs might only invest in seed rounds others only in series b's
that's on the one hand and then on the other hand you might have some that say i only do a certain
industry within tech so only software or i only do biotech and so on and so forth now that we
understand how they invest let's now look at when and how they actually exit the investment when
i say exit i mean that they sell their stake in the startup so there's typically three main exit
strategies the first one has to do with selling to another vc so for instance if one vc invested
very early on it might sell it to another vc that maybe in a series c say so it's a bit later down
the line and they've made their money and they're happy with that so they might sell at that stage
secondly there's excess through an ipo so an ipo is basically when a private company decides
to sell its shares to the public markets this is an extremely glamorous process usually the
news is all around it and some recent examples include zoom or airbnb you might have heard
and essentially the vc had the money owned privately they had a private stake in the company
and once the company goes public they decide they decide to sell the shares to the public markets
so that's the second way that they cash out the third way that they cash out is
through an acquisition by a bigger company so a startup might be doing well and it might be
noticed by say google apple or one of these big tech firms they might decide to buy it
a recent example could be shazam for instance which was actually bought by apple and so
through that the vc actually decides to cash out as well right and generally those are the
three main ways that the vcs make money so yeah that's an explanation of vcs hope you
found it useful if you did feel free to like and subscribe and i'll hopefully catch in the next one