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Demystifying the Venture Capital Investment Process

Unlock the secrets of venture capital with our comprehensive guide. Learn about the investment process, key players, and insider tips for securing funding. Demystify venture capital today!

By teammarquee . September 25, 2023

raising venture capital

In this ever-evolving startup landscape, venture capital investment processes help propel innovative startups and bring them to the forefront. However, there is always a cost associated with offering financial help to fledgling businesses. Even though there are limitless growth opportunities, startups also carry a significant risk. Despite the challenges, several venture capital (VC) firms like Y Combinator, Sequoia, Tiger Global Management, and Matrix Partners provide fledgling enterprises the essential boost. 

Venture capital (VC) is the name for the money supplied by VC companies, which seek to invest in high-risk enterprises with the expectation of large returns. In this blog, we will go back to the basics of the venture capital investment process, dissect the mechanisms, and shed some light on the nuanced dance between investors and startup entrepreneurs.

To begin with, let us first understand venture capital term and concept:

What are Venture Capital Funds?

To understand venture capital funds, you need to know that a stock of money formed as a trust or corporation registered with SEBI is referred to as a venture capital fund (VCF), according to the Securities and Exchange Board of India (SEBI). The VCF will have a designated pool of funds that will be raised in a certain way and invested in accordance with SEBI regulations.

VC funds are a collection of funds assembled from various investors that a fund manager uses to invest in particular firms. Most VC firms manage between $100 and $200 million in venture capital a year for their investors. After the venture capital due diligence by the fund managers, the fund is split among several startups, although it is occasionally invested in only one. 

Securing venture capital is crucial for startups as it provides them with a financial lifeline required to transform innovative concepts into viable businesses. However, attracting venture capital hinges on several factors like: a compelling, scalable, and innovative business idea, a strong and dedicated team with industry expertise, proof of market traction and revenue growth, and a well-thought-out business plan.

Who invests in Venture Capital funds?

Limited Partner investors, often known as LPs, are wealthy individuals, and institutional investors provide most of the funds a VC company invests. Some common types of institutional investors in venture capital funds are endowment and pension funds, hospitals, charitable trusts, and insurance companies.

In contrast, high-net-worth individuals, also called angel investors, contribute a relatively small amount of the total capital in the VC ecosystem. High net worth persons are those who have a net worth of above $2 million in liquid assets. 

How does venture capital get paid?

VCs typically expect a 20% return on their investments. They earn returns on their investments through a combination of fees and a share of the profits generated by the portfolio companies. Venture capital success factors depend on the ability of the fund managers to evaluate the performance and risk levels thoroughly. 

VC firms generally charge an annual management fee, typically 1% to 2% of the total capital committed. This management fee covers the fund’s operating costs, including salaries, office expenses, venture capital due diligence, and administrative overhead. Then comes the “carry”, also called the carried interest, which is the primary source of profit for venture capital firms. VC firms generally receive a 20% carry from the profits once certain conditions are met. In some firms, limited partners also receive some preferred return on their investments, which are typically set as a certain rate of returns. At the time of the exit event, such as an initial public offering (IPO) or an acquisition, the venture capital firm receives a share of the proceeds based on its ownership stake in the portfolio company. 

Additionally, firms would have to pay back six times the investor’s investment during a ten-year VC funding period. While VCs expect to receive a 20% compound return, the winning investments are the ones that yield 30x returns within the VC investment timeline

Angel Investment vs. Venture Capital- What’s The Difference

Startup funding is explained in these two terms. While both VC and angel investing share the common goal of supporting startups and emerging entrepreneurs, they exhibit notable distinctions. 

  • Firstly, venture capital primarily entails funding from professional investment firms that oversee combined resources from institutional investors and affluent individuals. Conversely, angel investment comprises investments made by high-net-worth individuals, known as angels, using their personal finances. 
  • While venture capital typically involves substantial capital injections and targets startups from their early stages to the growth phase, angel investors tend to focus on seed and early-stage investments.
  • VC funds can offer larger quantities of money to firms with the potential for quick development because they are often larger in size than individual angel investments. 
  • Unlike angel investments, VC companies frequently adopt a more hands-on strategy, offering direction, supervision, and resources to aid entrepreneurs in scaling quickly.

While both angel investors and venture capital funds aim to support startups, their approaches to investing, timing, and engagement vary. Early-stage firms benefit greatly from the flexibility and personal participation that angel investors can provide, but established businesses with aggressive development plans are best served by different VC funding stages

Preparing For The Ask

Securing VC funding requires meticulous preparation rather than approaching investors without a clear plan. There are four fundamental steps to readying yourself:

  • Assess Your Business Concept and Market Viability: It is imperative to ensure the marketability of your business idea before seeking an investment. Startups must conduct comprehensive market research and talk to potential customers, industry experts, and advisors to ascertain if their idea addresses a genuine problem.
  • Cultivate a Strong Founding Team: Ensure your team possesses the requisite expertise experience, and shares a unified vision. Highlight any past entrepreneurial or industry accomplishments to showcase your capacity to execute and deliver results. 
  • Craft a Robust Business Plan: A well-defined business plan is indispensable; without one, no investor will take you seriously. Make a plan that precisely delineates your revenue streams, pricing strategy, cost structure, and distribution channels. Make your roadmap to profitability and business scalability. 
  • Construct an Engaging Pitch Deck: Condense your business into a compelling Venture capital pitch deck that communicates your value proposition, market potential, competitive edge, and scalability. Your pitch deck must be a persuasive narrative that captivates your potential investors.

Finding the Right Venture Capital:

Finding an ideal investment partner with a good venture capital investment strategy is ideal for business growth. 

  • Start by completing in-depth research on several venture capital organisations, considering their areas of expertise, preferred investment stages, and track records. 
  • Look for businesses that fit your industry and stage of development. 
  • Analyse their investment criteria, portfolio firms, and any unique skills or value-added contributions they make. 
  • Utilise your contacts and network within the startup ecosystem to gain knowledge and suggestions. 
  • Shortlist some firms that will not only supply the required funds but will also offer strategic advice, connections to the industry, and a shared vision. 
  • Start pitching to venture capitalists to grab a great deal. It all eventually comes down to negotiation. 

A successful venture capital deal requires negotiation, so make sure to approach it with caution. Understanding term sheets and valuation throughout the negotiating phase is essential. Negotiate a fair price based on comparable sales in the market and consider ownership dilution. 


To turn their ideas into profitable enterprises, ambitious entrepreneurs may find venture capital to be a game-changer. You may significantly improve your chances of obtaining finance and opening doors for expansion by being aware of the nuances of venture capital, planning meticulously, and looking for the ideal investment partner. Remember that venture capital is about finding a strategic partner that shares your vision and can provide invaluable skills and connections, not simply about the money investment.

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The venture capital investment process typically involves sourcing promising startups, conducting due diligence to assess their viability, and then providing funding in exchange for equity ownership, followed by active involvement and eventual exit strategies to realize returns.

Venture capital funds commonly operate over extended durations, typically spanning 8-10 years from their initial closing. Fund managers often pursue pre-set extensions of 2-3 years to facilitate a seamless exit from their investments, and there's potential for early termination based on specific trigger events.

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