Venture Capital Explained - YouTube

hey everyone my name is kenji and in this video  i want to explain what venture capital is so all  

these companies here at some point in their life  were funded by venture capital so let's start with  

a basic definition so simply put venture capital  is money that's provided by investors to startups  

and in exchange that startup is going to give  the investor a certain portion of their company  

so that vc or that investor if you will hopes that  the startup is going to grow and so that stick  

that they had is going to be a lot more in the  future so that's a basic definition and let's get  

into the details there's really four main parts  i want to cover the first one has to do with the  

venture capital structure who its clients are for  instance secondly we look at the funding rounds  

the different points in which they can invest  money thirdly we'll talk about the investing  

strategies what kind of companies they seek and  then fourthly we'll talk about some of the exit  

strategies or how they cash out so let's start  with the vc structure and the general dynamics  

so on the one hand you have the clients so these  are people that invest the money in the vc fund  

and these might include large institutions like  pension funds mutual funds insurance companies  

and others then in turn they expect the vc to give  them positive returns right now once the vc has  

the money it's got to find the returns right so  they invest in a startup and in exchange for the  

money the startup is going to give them a stake  in the company so basically they sell them a small  

portion of the startup i also want to add that  the relationship between a vc and startup is not  

purely financial it's it's a close relationship in  which the vc often gives them advice it gives them  

some help with recruiting for instance and other  things like that so they're in close contact  

but because startups are risky they actually got  to invest in many different ones so you may have  

also heard of the term called angel investor  that's basically the same thing as vc the only  

difference is an angel investor typically invests  his own money while a vc invests other people's  

money so as for how long these funds last it's  typically seven to ten years depending and so  

the first couple of years they're actually  going to be looking at investing the money  

then throughout the middle periods they're hoping  that it's going to grow and then towards the end  

they're gonna try to liquidate and cash out their  positions and then once that whole cycle is done  

the vc if it's been successful it might raise  another round of money and do the whole thing  

again so now that we understand more or less the  dynamics of a vc let's look at their different  

funding rounds so the different moments in which  they decide to invest before that let's first look  

at the life cycle of a company so it typically  begins with just an idea the classic example is  

steve jobs and wozniak back in their garage for  instance and then from there it starts to grow  

right this is the growth stage and typically  the companies are not that well known yet  

once after that it hits the maturity stage and  that's maybe for instance nike these days and  

then after that we'll get into what's called the  decline stage an example maybe a bit controversial  

could be general motors so where does the vc come  into the picture they typically come around the  

idea in the growth phase now within that idea  and growth phase there's multiple periods in  

which they can invest in so here's some of the  main ones so first one's seed funding and this  

is basically the earliest asian company when it's  basically just an idea after that there's a series  

a so this is when there's a lot of growth and the  company is generally projected to do very well  

next up is serious b and typically that's  when they're actually starting to make money  

revenue in this case not profit so they're  generating a lot of sales say then after that  

you might have a series c where they're looking  to expand say expand internationally for instance  

then there's series these e's etc but to be honest  once you're at that stage you're definitely a  

successful company you're doing very well you may  not be making profit but you're still doing very  

well and you have high prospects but to be honest  unfortunately most companies don't even get to  

that stage typically a startup might be able to  get a seed round and by series a it's probably  

going to to go bankrupt just because they're not  going to be able to raise enough money and not  

enough people are going to believe in the product  so it's definitely a very very cut throat industry  

so now that we understand the funding rounds let's  look into the types of startups that they look for  

so generally speaking there's three main traits  the first one has to do with it being a large  

market so basically whatever target market the  startup has has to be big enough for them to grow  

right if there's not much money to be made in the  market then what's the point the second one has  

to do with having outstanding people so making a  startup is obviously extremely difficult the odds  

are definitely against you and so you want to have  the best group of people possible and then lastly  

you have having a quality product or service so  if you have an outstanding product or service  

essentially sooner or later that's gonna do well  so that theory is great it doesn't take a genius  

to figure that one out so let's look into what  they actually look like in real life because  

it's not so simple so firstly they're typically  startups that lose money if they were making money  

then they probably wouldn't need to sell part of  their company to a vc right so that's number one  

number two they typically tend to be growing at  say something like 50 to 100 percent so there  

whether it be their sales or the number of users  are growing hugely exponentially and then lastly  

their business on the whole is a scalable one  so for instance a non-scalable business would  

be a restaurant say where every time you want  to grow you need to create a new restaurant and  

so that might take years to to buy the site to  reconstruct etc whilst a scalable business could  

be something like a social media site where all  you need to grow with is one person to sign up and  

they maybe take 10 seconds to sign up right so  it's easily scalable and you can see why vc's  

tend towards the tech side just because the  products itself are very easy to scale right  

and to be honest most startups fail it's something  like over 70 percent i think fail and so that  

means that for a vc they need to invest in tons of  them and more or less for them it's about 9 out of  

10 that fail or don't do as well as they expected  and that one out of 10 is the one that's gonna be  

pulling for all the other nine losers in a way and  so it's a bit of a high risk and potentially high  

reward game here so the irony here is that  even if most investments end in a failure  

one or two good ones can actually make or break  your fund that's essentially what gives you the  

reputation so for instance if you invested  in google or facebook in their early years  

that reputation and that notoriety stays with  you throughout right so here's some examples of  

the most famous vcs the first one and probably  the most prestigious one out there is sequoia  

capital these guys have been around since 1972 and  some of their biggest investments include apple  

google and dropbox so really companies that  today are at the forefront of technology  

another big one is andros and horowitz and they're  actually fairly new they were founded in 2009  

and among their biggest investments include  skype twitter or airbnb now both of these i've  

mentioned are fairly large so they invest in all  sorts of businesses but overall there's some very  

specific ones so for instance some vcs might only  invest in seed rounds others only in series b's  

that's on the one hand and then on the other hand  you might have some that say i only do a certain  

industry within tech so only software or i only  do biotech and so on and so forth now that we  

understand how they invest let's now look at when  and how they actually exit the investment when  

i say exit i mean that they sell their stake in  the startup so there's typically three main exit  

strategies the first one has to do with selling  to another vc so for instance if one vc invested  

very early on it might sell it to another vc that  maybe in a series c say so it's a bit later down  

the line and they've made their money and they're  happy with that so they might sell at that stage  

secondly there's excess through an ipo so an  ipo is basically when a private company decides  

to sell its shares to the public markets this  is an extremely glamorous process usually the  

news is all around it and some recent examples  include zoom or airbnb you might have heard  

and essentially the vc had the money owned  privately they had a private stake in the company  

and once the company goes public they decide they  decide to sell the shares to the public markets  

so that's the second way that they cash  out the third way that they cash out is  

through an acquisition by a bigger company so  a startup might be doing well and it might be  

noticed by say google apple or one of these  big tech firms they might decide to buy it  

a recent example could be shazam for instance  which was actually bought by apple and so  

through that the vc actually decides to cash  out as well right and generally those are the  

three main ways that the vcs make money so  yeah that's an explanation of vcs hope you  

found it useful if you did feel free to like and  subscribe and i'll hopefully catch in the next one