Introduction to Venture Capital (Part I)
The Basic Concepts of VC — Overview of Venture Industry
The purpose of this series of articles — Introduction to Venture Capital (Part I, II, and III)— is to briefly introduce the VC world. The articles mainly comprised my research works. Any advice is appreciated, and I hope to improve ourselves together!
This article (Part I) is about the basics of venture capital, including its definition, role in start-up financing, differences with private equity, global trends, leading markets, and unicorn companies. The second part of the article details how venture capital works in practice, including its stages and tasks, as well as the structure of VC funds with general partners and limited partners.
Introduction
(1) What is Venture Capital (VC)?
Start-up Financing Cycle
(2) VC in Start-up Financing Cycle
(3) Difference Between VC & PE
Trends & Facts of Venture
(4) Global Trends & Facts of Venture
(5) Largest Venture Markets: US, Asia, and Europe
(6) Unicorn Companies(1) What is Venture Capital (VC)?
Venture Capital (VC) is a form of investment in high-risk, high-growth startups with the potential to succeed within a reasonable timeframe. VC funds have a long investment horizon, usually five to eight years or longer, and the VC firms eventually exit the investment. They invest in companies that need capital to finance product development or growth, particularly in high-tech startups.
(2) VC in Start-up Financing Cycle
A start-up’s growth is typically divided into three stages: founding, development and growth, and maturity. Angel investors provide funding during the founding stage, while VC firms offer funding during the development and growth stage. Finally, private equity (PE) firms or an initial public offering (IPO) are the means of financing for companies in the maturity stage.
VC firms start to get involved when the company moves into the development stage and continue to provide funding for growth and expansion. Eventually, VC firms exit the start-up either through a buyout by PE firms or others, or by taking the start-up public through an IPO. This allows venture capitalists to profit from selling their shares to other investors.
Over the past five years, VCs have accounted for the majority of venture investments (around 32%), compared to Angels (about 10%) and PEs (about 8%).
(3) Difference Between VC & PE
The primary difference between VC and PE is the stage of the investee company. VC firms focus on early-stage and technology-focused startups, while PE firms acquire established, mature companies across various industries. Furthermore, PE firms typically invest large sums of money in a smaller number of companies. In contrast, VC’s stake is not controlled and gradually dilutes with each funding round.
In the broad sense, technically, people sometimes consider VC as a subset of PE, which refers to capital invested in private companies that are not publicly traded or listed.
(4) Global Trends & Facts of Ventures
In the latter half of 2022, venture funding worldwide declined by 35% to $445 billion from $681 billion in 2021, indicating a slowing funding climate for 2023. However, this decline is debatable, as 2021 may be seen as an anomaly due to various factors such as the fall in the stock market, mass tech layoffs, and the collapse of the crypto market.
(5) Largest Venture Markets: US, Asia, and Europe
Over the past few years, the US has been the largest venture market, followed by Asia and Europe. In Q4 2022, US-based companies raised $31.9 billion, accounting for 48% of funding, with VC accounting for 30%, Angel for 12%, and PE for 6%, according to CB Insights.
(6) Unicorn Companies
Start-ups valued at over $1 billion are considered unicorn companies. These companies can remain private due to VC funding, which provides the necessary capital to scale operations and reach billion-dollar valuations without going public through IPOs.
Here are top unicorns by valuation in 4Q22:
Unicorns that perform well are often in specific industries. According to PitchBook, above half of the top global unicorns are fintech start-ups. Although the figure for new unicorns in 4Q22 corrected to nearly the historical norms before 2021, given the success of these unicorns, fintech is expected to remain strong in 2023 and more fintech unicorns are expected to emerge.
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Click here: Introduction to Venture Capital (Part II)
