During the week of February 6th I had a chance to attend the annual VC Deal Camp in Berkeley. This camp is an intensive workshop geared towards attorneys and investors regularly engaged in the business of private equity financing. The following summaries and observations are derived from the camp and provided as educational briefings to my local entrepreneurs and investors.
What exactly is Venture Capital?
Hopefully, you know a little something more than what was portrayed in The Social Network. Maybe you've poured over the VC and investment discussions in quora.com, flipped through Brad Feld's book Venture Deals or Paul Gompers' The Venture Capital Cycle (both highly recommended), or even participated in a deal or two yourself. If not, you'll want to begin your understanding of venture capital with this attractive infograph from fundersandfounders.com, which identifies where a venture capitalist enters along the development lifecycle and what equity ownership consequences he or she brings.
Why Venture Capital?
Now that you understand the basics, a question may arise for you as to why one would accept a significant ownership dilution at the hands of a VC instead of choosing the more traditional route of bank financing. Greg LaBlanc of UC Berkeley's Haas Business School stresses that it's all about the relationship that is cemented with VC investment. One could go the debt financing route with a traditional bank, though regular interest payments are not ideal for a startup. More importantly, most banks are ill-equipped to offer the mentorship and business partnership opportunities of an established VC.
When you invite someone in with a slice of grandma's famous rocky top pie, or in the more typical case a Stella, two-day old slice of Community Pie, and inside demo of your new next huge thing, you invite someone to take a vested interest in your success. A VC can thus be more instrumental than a consultant, stockholder, lender, or amalgam thereof. In this way, you can start to look at capital markets as sources of advice instead of cash; similarly, you can start to envision the VC pitch as a platform for a VC to sell to you, instead of the other way around.
More on financing, cap tables, and financing instruments in Part II...