Here at Crunchbase News, we cover the intersection of technology and money, paying particular attention to venture capital.
Exciting? Not to everyone. Important? Yes. For better and worse, a huge amount of money is controlled by a relatively small number of folks who make decisions about what the future might look like based on the businesses they back. It’s rarified air, to be sure, but air all the same.
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And that is why we’re compiling an open, ever-expanding guide to the VC industry. We’ll start with the very basics here.
Chances are, you’ve got some familiarity with the subject. You might work for a venture-backed startup. You may even have founded one. Or, heck, you could be a general partner at one of the many firms which have raised billion-dollar funds this year.
Just like Wall Street is just a bunch of glass buildings with computers in them, Sand Hill Road—a major center of gravity in the North American VC market—is just a hodgepodge of drab office buildings situated on a hill in Menlo Park, CA that, we acknowledge, is kinda sandy. There’s even computers there, too. It’s really not that exciting.
But before delving into greater depth about who invests in VC (hint: rich folks), how VC firms are structured (hint: it’s complicated), and how they get paid—all of which, and more, are coming in future parts of this guide—we’ve got to start from square one: Where is VC in the universe of investment opportunities?
Key Terms Defined: What Is Venture Capital?
VCs invest other people’s money in young companies in the hopes of generating an outsized return, despite the risks.
The first order of business is to triangulate VC’s location in the world of finance and investments. Let’s start super big picture before narrowing it down a bit, shall we?
- Investment Assets: This is the whole universe of money that’s “looking for work.” In this particular reading of the capitalist system, money’s only job is to make more of itself.
- Alternative Assets: As opposed to more conventional assets like publicly-traded stocks and corporate or sovereign bonds, alternative asset classes comprise basically everything else. Hedge funds of varying strategies, real estate, commodities, and expensive art are all considered alternative assets. Although each country’s laws differ, alternative assets are typically accessible only to high-income and high net worth individuals and professional money managers. More on these folks in a bit.
- Private Equity (PE): Private equity, in the most inclusive sense of the term, simply refers to the equity (stock) of privately-held companies. Because stock in private companies isn’t traded on open markets, it tends to be illiquid (difficult to exchange for cash on short notice) and inefficiently priced. Except for the earliest phase of company development, where some intrepid individuals invest their own capital in a fledgling business, most investment comes from institutional money managers often specializing in a particular stage or sector.
- Venture Capital (VC): Although technically a subset of private equity investors, venture capitalists have carved out a distinct niche for themselves in the investment ecosystem. Though definitions abound, basically, a venture capital firm is a type of company which invests capital from its investors into a portfolio of companies with a high-risk, high-reward profile. It is in turn the fiduciary responsibility of investment professionals at the VC firm to diligently monitor and, wherever possible, actively assist their portfolio companies to maximize the likelihood of a positive financial outcome.
One quick note about the distinction between VC and PE. For a long time, investment strategies clearly differed: VCs would invest typically for minority stakes in scrappy startups, whereas PE investors would invest in more mature businesses, often along different strategic lines. However, giant new funds from the likes of SoftBank, Sequoia, and others, are beginning to blur that line a bit.
Primary Deal Types
Crunchbase tracks a wide variety of funding events, mostly involving privately held companies. The full set of funding round types can be found here, but here’s a selection of the most common equity funding round types you’ll hear about:
- Angel: An angel round is typically a small round designed to get a new company off the ground. Investors in an angel round include individual angel investors, angel investor groups, friends, and family.
- Pre-Seed: A pre-seed round is a pre-institutional seed round that either has no institutional investors or is a very low amount, often below $150k.
- Seed: Seed rounds are among the first rounds of funding a company will receive, generally while the company is young and working to gain traction. Round sizes range between $10k–$2M, though larger seed rounds have become more common in recent years. A seed round typically comes after an angel round (if applicable) and before a company’s Series A round.
- Series A and Series B. These rounds are for earlier stage companies and range, on average, between $1M–$30M.
- Series C and above. These late-stage rounds and onwards are for more established companies. These rounds are usually $40M+ and are often much larger. (We’ve written a lot about “supergiant” rounds of $100M or more, and many of them are Series C or later.)
- Private Equity: A private equity round is led by a private equity firm or a hedge fund and is a late stage round. It is a less risky investment because the company is more firmly established, and the rounds are typically upwards of $50M.
It’s worth mentioning that, over time, the definitions of very early-stage round types like “seed” and “Series A” have become somewhat muddied. Seed financing stratified into “seed” and “pre-seed.” New sources and methods of funding—crowdfunding platforms, convertible and SAFE notes, and an explosion of incubator and accelerator programs—helped more entrepreneurs secure capital for their ventures. But, at the same time, because rounds have gotten bigger over time, it’s hard to guess what stage a company is at solely based on their total capital raised.
The Taxonomy Of Investors
Crunchbase tracks many kinds of investors, most of which are listed and defined in this Knowledge Center article. Here’s a selection of the most common participants private company funding rounds:
- Venture Capital: Venture Capital firms invest in startups at a variety of stages, ranging from seed to Series A and beyond. Venture Capital firms take equity in exchange for capital, seeking to invest in firms from the first VC round, Series A, through to later stages as the company grows.
- Angel Investor: Individual investors who invest in startups using their own money.
- Accelerator: An accelerator takes a set amount of seed equity from a number of young startups in exchange for capital and mentorship.
- Micro-VC: A micro-VC invests in startups and typically has a fund size less than $100M. Micro-VCs are a type of Venture firm that focuses on early stage seed and Series A investments.
- Private Equity Firm: A private equity firm is an investment management company. When they do invest in startups, it is typically in the private equity, or later stage venture rounds (Series C and beyond).
Stay tuned for future installments of Crunchbase News’s guide to venture capital. The next questions up on the docket:
- Who gets to invest in startups and why?
- How VC firms are structured?
- What’s the structure of a VC deal?
- How do investors get paid?
We’ll be sure to link it back here! Stay tuned!
Illustration: Li-Anne Dias