Venture Capital is a unique financial construct where investors make equity investments in potentially high-growth but highrisk, innovative enterprises and, even though the majority of these ventures fail, average a higher rate of return than any other class of investment. VC is a very young industry, barely 40 years old, and very poorly understood, which is a pity, as it has been instrumental in creating more entrepreneurs, innovation, wealth and employment than any other economic activity.
This is why a book that seeks to explain the intricacies of this sector to the various stakeholders is always welcome. Yinglan Tan has done a great job of handling this unenviable task although, on occasion, the book does suffer from attempting to be all things to all people.
While the book dwells more on would-be VCs and GPs and LPs than in a VC Fund, it does have some good nuggets for entrepreneurs. I thought I would pull some of these out and add my views for the benefit of the starryeyed optimists hoping to create successful ventures.
1. Be very clear and precise about the product or service, the target market, the pain point you plan to address, is it a "must-have" or just "nice to have" et al.
2. Do ensure that the market for your offering is large and rapidly growing, as this will allow your venture to grow to a significant size quickly. This also minimises risk.
3. Make sure you understand what and who your competition is, how defensible your proposition is and remember that to succeed you must do something "different" or "differently".
4. It is not necessary for a CEO to know everything but, before you seek investment, make sure that the top team collectively has the skills/experience that is required.
5. All businesses are not appropriate for venture capital. One example: Life style businesses— which generate healthy profits but have "flattish" growth trajectories—are not suitable for VCs, who invest in high growth businesses that can go public or get acquired and give them a high return on their investment. Getting a VC into a flat business can only lead to strife between the founders and the VC.
6. Bankers look at your record, VCs at the future. VCs share the risk with the founders, so you should be willing and keen to involve them in your business as they want to add great value. If you cannot treat the VC as a partner, do not raise venture capital.
7. A vc Fund will need to exit its investment in an agreed time frame. You need to be prepared for what this entails, viz., taking the company public, agreeing to have it acquired, etc. Be transparent. VCs invest in hundreds of businesses and are very realistic in their expectations. They neither demand nor expect perfection and understand that things can go wrong. But they are very fixated on a high level of integrity and want the business run fairly and ethically even if they hold a minority stake. So on no account be opaque or hide anything as VCs will discover this anyway and, once a trust is broken, the whole relationship sours.
8. Some of the world's most successful and iconic businesses have been made possible by VC investments so, go ahead take the risk and, if you do not succeed, try again. Remember you have not failed till you decide to give up!
— The reviewer is Chairman, Indian Venture Capital Association, and Co-founder, Indian Angel Network
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