Venture Capitalists: Why and How They Invest in Startups | Business Town

Venture Capitalists: Why and How They Invest in Startups

  From the size of the market to the solidity of the founding team, learn what VCs look for in startups and how they invest.


Disclaimer: The contents of this presentation are intended to convey general information only and are not intended to constitute legal services or the provision of legal services. This video should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice law in your jurisdiction. This video presentation does not constitute an offer to represent you and nothing on this website is intended to create an attorney-client relationship. The information presented in this video presentation may not reflect the most current legal developments. No action should be taken in reliance on the information contained in this video presentation and we disclaim all liability in respect to actions taken or not taken based on any or all of the contents of this site to the fullest extent permitted by law. You should contact an attorney for advice with respect to particular legal issues or problems.

My name’s Scott Bleier and I’m a corporate lawyer and partner the law firm Morse, Brown, and Pendleton in Boston, Massachusetts where I focus my practice representing entrepreneurs. start up companies, and venture capital investors.

Today we’re going to talk at a high level about venture capital investing, specifically why venture capitalists tend to invest in companies in the first place and then were going to scratch the surface and talk about some of the different funding models that venture capitalists typically use with start up companies.

What’s the Market Opportunity Size?

So first things first, I’m not a venture capitalist, but as a lawyer that works with start up companies that receive venture capital financing, oftentimes start companies will approach me and say “Scott what are some of the factors that venture capitalists consider whether deciding whether to invest in a company in first place?”

I think we can distill that down to a handful of components that go with the decision-making of venture capitalists. The first one is what is the size of the market opportunity for the start up company? Venture capital firms typically want to invest in companies that can be significant players in larger markets, not to small niche markets.

What is the problem that you as a startup company are trying to solve? Is it a large problem that is a problem encountered by a lot of individuals and potential consumers down the road? Size and market opportunity very important for venture capitalists when deciding whether your business is a viable business like to invest in.

Competitive advantage

Number two, what sort of competitive advantage do you as a startup company have? Venture capitalists love to invest in companies that really have a head start on the competition, so whether it’s some sort of proprietary intellectual property that you have. perhaps intellectual property that you have patented so that you can foist off competition from other competitors. Do have innovative sales and distribution channel that is really setting you apart from the rest of the pack? If you can show that you have an advantage over your competitors that’s going to allow to grow more quickly, and more efficiently than other companies then it’s a major check in your column in terms of your ability to be able to raise money for venture capital firms.

How Strong is the Management Team?

Next how strong is the management team or the founder team? At the end of the day, a venture capitalist is not only investing in a business and the business idea, they’re investing in you, the entrepreneur and the founder. Start up companies can go through peaks and valleys, twists and turns, pivots and venture capitalist want to make sure that they’re essentially betting on the right horses and in a race to the finish line and so the strength of the management team it certainly is an entrepreneur had previous successes with other startup companies, that can be something that’s very attractive to a venture capitalist. The management team profile, the personalities. the makeup of the interrelationships amongst the cofounding team that’s can be a very important factor for venture capital investors are considering investing in startup company.

Customer Validation

Lastly customer validation is very important. At the end of the day, companies exist to create users, customers to sell products. so if you, not withstanding the fact that your startup company, if you’re in the nascent stage of your life cycle development I,f you already has some customer validation you’ve already started selling some of your product, you already have some some revenues coming through the door, that’s gonna be compelling evidence for a venture capital investor to take a chance on you and invest in you. It’s always easier to build to show something to someone as opposed to tell them something, so rather than saying if “I only had $1,000,000 in my bank account from you, Mr. or Mrs. Investor, look how I’ll be able to grow my company. It’s a compelling argument to say, look despite virtue being bootstrapped with little-to- no investment capital, look I’ve been able to achieve. If only I were to have some additional investment capital account, look at how I’d be able to scale and grow my business.” So again, early customer validation a very positive mark for start up company looking to raise venture capital investment.

Published Data

So having spoken just now a little bit about the reasons venture capital investors decide to invest in start up companies in the first place, let’s just talk really quickly about what some of the published data is saying about the number of the companies that are receiving venture capital financing in the United States and the aggregate amount of money being invested into start up companies. So the published data suggests that in 2015 there was about $72 billion invested by venture capital firms in the United States, and those went to about 4000 different companies. Bear in mind that’s not all start up companies. That’s private companies at all stages of development from very nascent stage with seed financings to more mature companies that are having series C or D financings.

In the aggregate, about usually $72 billion invested across 4000 companies last year in 2015. In terms of a breakdown by industry, about 55% of that money was invested into technology companies and about 45% of that money invested into life sciences companies.

There are regional breakdowns that are available from publicly available data also that you can look into. I work on the East Coast the Boston area about 10% of that total money was invested in the Boston area last year’s about six or seven billion dollars with more or less the same breakdown between life sciences companies and technology companies, but hopefully that gives you an idea of the order of magnitude in terms of numbers of companies that are getting financed and amount of dollars are actually being invested in companies.

About Scott Bleier

Scott’s practice is focused on the representation of entrepreneurs, emerging technology companies and venture capital investors. Scott specializes in corporate and securities law; private financings; and mergers and acquisitions.

Scott has worked with technology companies and their founders in a wide array of industries, including software, e-commerce and internet, life sciences, biotechnology, retail, consumer products, manufacturing, and healthcare information and management. Scott serves as outside general counsel to his company clients, advising their boards of directors and senior management on a broad range of corporate matters, including company formation, founder equity structures, financing transactions, corporate governance responsibilities, equity-based compensation strategies, employment issues, intellectual property, and commercial transactions. Scott also regularly represents these clients in mergers and acquisitions, including a significant number of sales transactions with large, public companies.

In addition, Scott devotes a significant portion of his practice to the representation of venture capital investors, negotiating and structuring portfolio company investments on behalf of these clients.

Scott also represents established foreign companies seeking to expand their operations to the United States.

Scott speaks regularly on entrepreneurship, start-up companies and financings, delivering presentations to entrepreneurs, investors and lawyers at the Cambridge Innovation Center, Swissnex Boston, the American Bar Association and the MIT Enterprise Forum. Scott currently chairs the Venture Capital Transactional Issues sub-committee of the Business Law Section of the American Bar Association.

Scott is a frequent writer on topics involving start-up companies and corporate law. You can follow Scott on Twitter at @bleierlaw.

Visit his Website