The accelerator will look through hundreds of these applications, and then make a small investment – Y Combinator now typically invests $120,000 for 7 percent of the company’s equity – after which the startup goes through a several month-long program that includesmentorship and networking mixed with long coding sessions. The goal is for the team to make enough headway on their product and pick up enough savvy to allow them to very quickly take on larger investments and grow very rapidly - hence the phrase ‘accelerator.’ This is why accelerators prefer teams that have technical talent, the skill to execute and a clear product vision with high potential to disrupt a large, lazy market, but may lack knowledge and familiarity with many ‘back office’ functions or otherwise be business neophytes.
Venture Capital Firms
These are companies with famous names like Sequoia, Venrock and Kleiner Perkins. They can cut checks ranging from merely a few million into the tens or hundreds of millions. Once you have gotten to the level where you are seriously talking to venture capitalists, you’ve done (at least) one of a few things: built a business with demonstrable and growing market traction, started to earn revenue and have a plausible case to make a lot more, made some meaningful and defensible technological or product advances, or have gotten a whole big bunch of really favorable press.
At this point, you have gone the route of the angels, gone through an accelerator, or simply self-financed, and have a pretty good idea of what your business is, how it works, and how you will get it to grow and become truly large in terms of yearly revenue. However, until you can hire a bigger team, either to market or build your product, or invest in the infrastructure to scale, it will take years and years to get there. And you’d rather do it now. This is where the venture capital firms or “VCs” come in - they can invest large funds to jumpstart this process and let you hire all those people and make those capex investments now, without having to wait.
Angels, accelerators and seed investors typically have the leeway to be able to wait indefinite periods of time for their money to come back, as they may not even report to anyone else. However, VCs have a board, outside investors, myriad regulatory filings up the wazoo, and only two primary ways to make their money back: their portfolio companies go public, which requires at least high eight to nine figures in steady, recurring yearly revenue, or get acquired by a bigger company.
So when you take on VC money, be well aware that they are looking for an exit on a timeline. Typically, after a seed round and a venture round, a company will go through Series A through D or E rounds, each time selling off a chunk of its equity for increasingly larger investments, before either being sold or going public (if all has gone as planned) somewhere around the C to E round of financing. However, by the time you hit Series A-E funding, you won’t need articles like this one to guide you - you will have teams of accountants and lawyers advising you - as well as your board telling you what to do.
At this point, while team and leadership remain important, these considerations take a second seat to the viability of the business itself. This is where founders who fail to perform may get pushed out in favor of professional CEOs, highly paid consultants brought in to run business departments, while simultaneously, teams of educated coders are hired to run professional engineering operations. With the amount of money involved in a VC round, especially beyond an A round, no individual - founders included - is irreplaceable.
As you can see, what investors are looking for varies a lot depending on the type of investor, the stage of your company and the type of businessperson you are. Earlier stage companies are driven by personality and face an uncertain market with an unproven business plan - so investors essentially place bets on the people running the company. Later stage companies, looking to raise larger amounts of money, are going to have to show more traditional business plans, books done according to GAAP and realistic growth projections in order to get land investments to accelerate to scale.
So, if you are looking to take on investment, you should take stock of your business, current or planned, and try to figure out where you fit into the growth cycle of a startup company. Knowing where to apply and how to make yourself fit into the worldview of investors will make it much easier to get funding in addition to helping you understand your own business better and allow you to plan for your own growth and, ideally, exit strategies.
Liberty McAteer is a Corporate Transactions and Intellectual Property Associate at Barton LLP. He assists in corporate formation and funding through company sales as well as all manner of software matters, including open source software, privacy concerns, intellectual property licensing and transactions. Follow @libertymcateer on Twitter for news related to startups, technology, privacy and software.