When starting a new company, one of the most important issues to handle is securing an appropriate financing structure. Entrepreneurs can choose from various types of solutions - one of them is venture capital (VC).
What is Venture Capital Financing?
Venture Capital (VC) is a form of private equity providing to small high-risk businesses with long-term fast growth potential. This risky investing in the form of seed or early-stage funding brings a huge opportunity for attractive, higher-than-average returns. Except for the significant financial engagement, VC funds provide startups with technical or managerial expertise, networking opportunities, and business support. Venture capital financing is the most popular choice for early-stage companies as they have limited operating history and poor chances of accessing capital markets or bank loans.
Venture capital has become an integral part of innovation a.o. in Central and Eastern Europe - it has been instrumental to the growth of some of the most successful CEE companies, such as UiPath (Romania), Prezi (Hungary), Infobip (Croatia) and Rohlik (Czech Republic).
In 2020, 25 CEE venture capital funds raised €667M, the region’s second-highest recorded level in absolute terms, which is almost 50% higher than the average of the previous 5 years. For this reason, if you are a startup looking for financing opportunities, we have good news for you: this trend is expected to continue in the upcoming years! Moreover, in the region, you can find a variety of VCs with different focuses according to your needs. For example, Impact Ventures from Hungary is the first fund in the CEE region specialized in impact investments and social entrepreneurship.
After already having some insights into the topic, let's move forward to the one of the most important question for fundraising startups.
How an early-stage startup can benefit from being backed by a VC?
Firstly, for new companies that have a limited operating history, venture capital financing is an essential source for raising money in order to get off the ground. Secondly, new businesses often come with high risk and high cost, so external capital is sought to reduce the risk of failure. However, in return for taking the risk through the investment, VC investors are able to obtain equity and voting rights in the startups.
Therefore, to be able to consider if VC financing is right for your company, let’s take a look at some of the most important advantages of venture capital financing for a startup – based on real cases we experienced at Impact Ventures.
1. Opportunity for expansion: a large amount of capital can be raised
There are many benefits that venture capitalists can bring to your business, but the most obvious one is the amount of funding a startup can receive. As a result of the large capital injection, a company with high-growth potential can expand way quicker than a firm without VC support. Therefore, the returns will be worth a collaboration for the entrepreneurs and for the venture capitalists as well.
A great example of the rate of growth enabled by venture capital is that most often in our invested companies, the operating staff grows twofold in the year of the investment, multiplying results in all involved areas from product development to marketing and sales. We often support go-to-market to multiple countries in quick succession as an accelerated internationalization.
2. Favourable financing options
A venture capital firm invests in your company for equity with the goal to help you grow, since a VC’s aim is to achieve big returns on an exit after 5-7 years. This means that it won’t require regular monthly payments for your business to make, unlike bank loans or debts. Also, you don’t have to make interest payments – you only have free capital allowing you to invest in your expansion i.e. hiring and building a team, expanding your operations internationally, or increasing your brand awareness through a more intense marketing or sales activity.
3. Help in risk management, reducing the likelihood of failure
If you have a high-risk idea and you need support (either financially or in expertise), venture capital can be hugely beneficial for your startup. Within the VC an experienced team will oversee your plans and operations, therefore the chance for avoiding major issues might be higher. The rate of failure of VC-backed startups is still extremely high (at the level of 75%), however, partnering with an expert advisor and having someone to turn to while making tough decisions, can improve the odds of success.
For example, the often sought support we regularly provide to our investees, is deep market research-based business modeling to mitigate risks in new market entries, and legal support & review when it comes to complex contracts and legal negotiations.
4. Long-term support in various areas
As a venture capital firm plans to exit in 5-7 years, they can provide you with long-term support in growing your business. Often, VCs are there in most (if not all) subsequent investment rounds, to further contribute as anchor investors. Furthermore, based on the special set of expertise of your funding VC, your startup may benefit from many different kinds of support.
For instance, our partners and advisory pool helps our portfolio companies with IT consultancy & resilience throughout the development phase, and can support them also in the final stage, by M&A expertise in preparation and execution of a lucrative exit.
5. Connections and networking opportunities
Are you worried about having limits in reaching out to CEOs, high-level leaders, managers, or other professionals? Venture capitalists can help you with that! VCs have an extensive network of connections you can take advantage of when growing your business. They can introduce you to potential partners, new clients, and even help you in talent acquisition and finding potential key employees. We’ve already helped our investees find CSOs, or enabled the acquisition of key B2B clients. You can also count on your investor to open doors, and negotiate next funding rounds with new investors.
6. Valuable guidance, mentoring, and expertise
Are you familiar with the phrase “smart money”? This means when you get VC funding, the capital comes with the expertise of the venture capital firm. VCs usually invest in areas that they know about – some of them have partners successfully exited their businesses before, or they are specialised in some industries and topics (like Impact Ventures in social enterprises, EdTech or Assistive Tech). Due to these, they can assist you with experienced advice regarding how to scale your company, how to solve day-to-day or bigger problems, or how to monitor your financial performance. Not to mention that they are doing this for around 10 startups at a time! When you have a VC on board, you have all their knowledge and experienced advice, which can be a huge value – especially if you are starting your first company.
A great example to prove our point is that we’ve seen and experienced many mistakes and failures firsthand made by our investee companies. So, we’ve learned from those, and from now on always make sure that if one of our startup’s founders is facing the same, they avoid those mistakes. We had several cases, where our colleagues became involved hands-on in helping to optimize pricing, managing greenfield developments or doing R&D.
7. Collaboration opportunities with other startups and industry experts
VCs have strong expertise in growing startups. They can share the experience of their different portfolio companies, and even help in creating new collaborations between them, which is beneficial for all parties. Venture capital firms can also help in building partnerships with other industry experts, as they are often partnering with external experts, incubators or accelerators.
We’re especially involved with impact measurement and communication experts, growth hacking specialists, and IT experts who often support the development of our portfolio startups.
8. Increased publicity and exposure
Being associated with a VC who has great recognizability and brand awareness can increase a startup’s publicity and add credibility to the business – especially for founders who haven’t built other successful companies yet. If a startup appears on the VC’s website and is mentioned in its multitude of channels, it can be noticed more easily by potential customers, partners, or other venture capital firms who are looking for new deals.
For example, we amplify the voice of our portfolio companies by reaching high-reach media outlets, and celebrating success stories to an audience of potential future co-investors.
9. Help in closing more funding rounds
Raising additional funding comes with a higher valuation and lower risk – that’s the reason why venture capitalists are interested in follow-on-investments and co-investments. Follow-on investments happen when venture capital firms contribute additional capital as the startup grows. Besides, they usually reserve the right to invest in future rounds as well. Co-investments are also a popular collaboration form among VCs - your investor can introduce you to additional venture capital firms or business angels that can assist the startup in specific business areas or challenges and help with their strategic advice. They can provide additional funding in later stages as well.
10. Trustworthiness
Finally, VCs are strictly regulated by regulatory bodies in the EU and national levels – they are subject to similar regulations as any other form of private equity investment. Due to these strict regulations, VC operations are highly controlled. More importantly, VCs leverage their reputation to gain access to the best deals. The best way you can determine the trustworthiness of a VC is to ask to speak with the founders of their portfolio companies, as they are the most credible source of reference.
To sum up, Central-Eastern Europe’s startup ecosystem is booming, making VC financing more available for innovative new business ideas. After having a close look on at the advantages of VC financing for a startup, one thing can be surely concluded: having a partnership with the right VC means a highly valuable resource for accelerating the growth of your company, as a VC can not only be your partner, but your mentor, strategic - and financial advisor, business coach, matchmaker, and many more at the same time.
Related Posts:
Overview Of Top Funding Sources To Grow Your Startup (by Kaja Dubielska, Vestbee)
Types Of Startup Funding Rounds (by Marcin Laczynski, Partner, Next Road Ventures)
How To Go From Seed Funding To Series A? (by Tomas Martunas, Founding Partner, Iron Wolf Capital)
