Each year, approximately 50 million startups are launched globally, yet only about 10% manage to survive their first year in business, with a staggering 90% ultimately unable to sustain themselves. One of the primary reasons for these failures is cash flow issues, which account for 82% of failed startups. Despite these daunting statistics, venture capitalists are drawn to the potential of discovering “unicorns,” or startups that achieve a valuation of over $1 billion.
This allure drives them to invest in early-stage startups, even when such companies have limited funding or tangible assets. For example? For a successful startup launch, it is also important to have mentors in different areas.
Artem Sokolov is the founder and general partner of the venture studio SKL.vc with a team of experts helps to realize your vision at every stage of development. They are focused on helping B2C startups at an early stage and turning them into game-changers in the market.
The importance of venture capital in startup growth
This type of private equity financing is essential for startups. Venture capital offers financial support in exchange for an equity stake, providing necessary resources like funding, mentorship, and strategic guidance, all without the burden of monthly payments.
Although startups may relinquish some control over management, investors take on the risk of losing their investment but stand to gain substantial returns if the venture succeeds. Venture capital is crucial for scaling operations and developing new products, attracting investors who are willing to embrace high-risk, high-reward opportunities.
Types of venture capital
Venture capital goes through three stages: pre-seed, seed and early stage financing. The first step helps in the development of initial business plans and products. This stage typically utilizes small amounts of capital from personal connections such as family, friends, or angel investors. These funds are critical for building the fundamental elements of the startup, such as conducting market research and finalizing prototypes.
Seed funding is the next step, providing the necessary capital to support product launch and marketing efforts. Unlike traditional loans, seed funding does not require immediate repayment, allowing startups to focus on growth without financial pressure. Investors at this stage can expect equity in exchange for their support, betting on the startup’s potential for success.
Finally, early-stage funding helps to scale up through multiple rounds, often referred to as Series A, B or follow-on rounds. This funding is needed to expand production and sales, hire additional staff, and improve technology and infrastructure. At this stage, startups attract investors who are interested in the broader vision and scalability of the company, expecting a significant return on their investment as the business grows and captures larger market segments.
Securing venture capital: a comprehensive process for startups
Securing venture capital for a startup is a detailed process lasting 3 to 9 months, involving investor contact, business plan submission, due diligence, and negotiations. Venture capitalists seek long-term partnerships, often taking active roles in management. Exit strategies include IPOs, secondary sales, mergers, acquisitions, and share buybacks to realize returns on investment.
Advantages of venture capital
Venture capital gives startups more than just financial support; it offers extended networks and mentorship. The main advantage is obtaining funding without debt repayment obligations, and access to mentoring from experienced investors, as well as acquiring capital without having to have existing funds or assets.
Drawbacks of venture capital
Venture capital offers a number of benefits, but also creates complex challenges for those starting a start-up. Mainly, there is competition for funds, as well as the loss of a controlling stake, and the British government has settled on business solutions. Founders often give up a share of the business, usually between 20% and 50%, which can lead to shared control.