What does venture-backed mean?

- Expert Investor (Invested in businesses before)

o Don’t need to be a Harvard graduate. You just need to invest
- Successful entrepreneur (has money to invest)

- You will not be the only VC firm investing in the company

- VC firms play in the idea and growth phase.

- The first amount of money that enters a business is called seed funding: Seed A,B,C,D,E

- Area of venture you capitalize in: late stage venture, mid stage venture, early stage venture
(each have different characteristics)

o For example, Seed funding A could be riskier but more awarding, or Seed E will be less
risky but will not have the same share of the business.
- VC Exit
o IPO at mature stage (make huge returns from the shares)
o Sell to a large private equity firm or another potential VC partner like entering in series A
to series C etc.

(3) Venture Capital EXPLAINED - YouTube

- In 2013, VCs invested nearly $11 billion in seed and early-stage companies, up more than 17%
from 2012
- Stage 1: Seed funding rounds are typically small and are channeled toward research and
development of an initial product.
- Stage 2: Startup capital in which companies look to begin marketing and advertising the product
and acquiring customers
- Stage 3: Early stage/first stage/second stage capital: Funding received at this stage will often go
toward manufacturing and production facilities, sales, and more marketing.
o At this stage, the company may also be moving towards profitability as it pushed its
products and advertisements to a wider audience
- Stage 4: Expansion stage/second stage/third stage capital: VC funding serves as more fuel for
the fire, enabling expansion to additional markets (e.g., other cities or countries) and
diversification and differentiation of product lines
- Stage 5: Mezzanine/bridge/pre-public stage: Company may be looking to go public. Funds
received can be used in activities such as:
o Mergers and acquisitions
o Price reductions/other measures to drive out competitors
o Financing the steps toward an IPO
- - Most V.C earn their money back in the IPO stage
The Five Stages of VC Funding Explained (coxblue.com)

- These funding rounds (seed funds) provide external investors the opportunity to invest cash in a
growing company in exchange for equity.
- Before a funding round takes place, a valuation of the company in question is done. Valuation
derives from many different factors, including management, proven track record, market size
and risk; one of the key distinctions between funding rounds has to do with the valuation of the
business, as well as its maturity level and growth aspects.
- Pre-seed funding: friends, family, and founders: The stage in which the company’s founders are
first getting their operations off the ground (exploring feasibility of converting an idea into a
product/service, market testing, and develop marketing and sales plan for the product launch)
- Seed funding: helps a company finance its first steps, including things like market research and
product development. Helps determine what its final products will be and who its target
demographic is. Most common type of investors participating in seed funding is an “angel
investor,” who appreciated riskier ventures and expects stake in the company in exchange for
their investment. Comes before a finished product
- Series A funding
- Series B funding
- Series C and beyond funding

Series A, B, C Funding: How Seed Funding Works (investopedia.com)

Introduction:

Fast was a one-click checkout program with the potential to revolutionize the e-commerce industry. The
fintech procured $120 million in seed funding from ventures like Stripe and Index Ventures. Loon,
Alphabet’s project, aimed at providing global internet access by stationing balloons in outer space. This
idea materialized through a $125 million capital investment. Quibi, raising a whopping $1.75 billion in
only two rounds of funding, was set to provide short-form videos on the mobile phone. Viewing the
local landscape, Airlift, a Pakistani start-up, raised $85 million to provide decentralized transport to the
masse. Despite differences in amounts raised and geographic locations, all these ventures shared a
common fate; they failed.

To understand why these venture-backed start-ups go under, the process of initial capital raising must
be understood.

The Process of Venture Capital:

The first equity funding stage is called ‘Seed Funding’. In this stage four different entities invest:
founders, family, friends, and angel investors. Angel investors are high net-worth individuals, who inject
large amounts of capital to steer the firm through the early difficult stages in return for stake in the
company. This initial stage is primarily for product development, including market research, legal costs,
and prototype production. To further raise funding to ensure successful operations, start-ups enter into
Series A, B, and C funding. Though more stages do exist like Series D and E funding, most firms do not
proceed past series C. It is in these stages that venture capitals enter the business cycle. It is to be noted
that angel investors are starkly different from venture capitals in that angel investors invest their own
money, and venture capitals invest the money of others. Furthermore, different ventures specialize in
different stages. Some ventures have a niche in Series A funding, while others in B and C funding.

Series A funding starts when the company is operational, has generated steady revenue streams, and
enjoys a strong user base. The objective of this funding stage is to help the business formulate a strong
strategy and serves as an impetus to achieve it. In this stage, well-known venture capitals include
Sequoia Capital, Intel Capital, and Google Ventures.

Series B funding begins after the development stage. In this phase, companies have shown abilities of
massive growth, so cash is injected to meet rising demand. The difference between series A and B
funding is that later-stage ventures enter the pool of investors, such as NEA and Khosla Ventures.

Finally, Series C funding kicks in, the last stage of equity finance for most firms before the initial IPO.
Ventures invest in the companies to help expand the businesses, such as acquiring another company. At
this point, the company is already meeting its targets and has high turnover. Since Series C is less risky
than others, more investors are willing to fund the business. Through such financing, companies are able
to boost their valuation before an I.P.O

Following Finance’s fundamental principle, Series A ventures receive higher equity than those in the
later stages due to the risk Series A ventures undertake. Furthermore, it is not necessary for ventures to
realize benefits only during the IPO; it can be reaped before. For example, a venture in Series A sells its
stake to a venture in Series C.

What are the reasons for most venture-backed companies failing?

1) Weak Management

During the start-up of the organization, a small team must handle multiple tasks since specialized
departments do not exist. This set-up is only viable when a firm is operating on a small-scale. However,
venture-backed companies are provided large amounts to diversify, so the small untrained team
becomes unsustainable to manage larger operations. Realizing that responsibilities have multiplied,
management starts employing workers hastily and may even appoint an inept individual to a key
position, having a detrimental effect on the business. One such symptom of bad management is the
poor decision making. A series of bad choices or imprudent decisions results in the collapse of the
business. Also, an unfit leader cannot effectively communicate the business visions to its workers, so
employees are not on board, and their objectives are unaligned with business goals.
 2) Lack of Cash

Despite sizeable amounts raised from venture capitals, if money is not spent frugally, it can lead to the
start-up’s impending demise. One reason for running out of cash is the handsome salary packages
offered to employees. The nascent business attracts new labor by setting up a honey pot, which in this
case is paying above competitive wage. In most cases, the start-up faces losses trying to maintain wages,
eventually leading to its fall. Another reason is the high-marketing costs that start-ups bear. Entering a
market and building a brand requires customers. Attracting customers results in heavy investments into
product advertisement, from shelf-display to providing free samples. However, this does not guarantee
the success of the product. If the campaigns are successful, the business enjoys high revenue, but, if the
advertisements are ineffective, the firm struggles to survive.

3) Business Model

Setting up a business and generating revenue is not enough for an enterprise to survive. The business
needs direction. A proper strategic plan must be devised by the senior management which will serve as
a guidance in decision-making. One major portion of the plan includes the business model that start-ups
adopt. Whether it be a freemium model or an affiliate model, it should be a profitable one. If the firm
implements an unprofitable framework, where the company faces a loss for every sale it makes, the
enterprise is sure to flounder.

Current economic stability and its impact on venture-backed start ups

At a time where oil prices are soaring, inflation has peaked, and interest rates have risen, the macro-
economic indicators portray a gloomy outlook for start-ups. The Pakistani Rupee has depreciated
causing many businesses like Toyota to shut down temporarily due to closures of Letter of Credits. So,
where established businesses fail to survive, start-ups have a slim chance. Also, as the global economy
was starting to recover from the devastation of CoVid-19, progress halted after the Ukraine-Russia
conflict and, for Pakistan especially, due to chronic political instability. It is difficult to predict when the
environment will be conductive to start-ups again, but, for now, such businesses can only wait and see. .