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Most founders think of VC funding as the path to success. But like so much else about running a tech startup, it isn’t that simple. Raising money is often less important than who you raise it from. The right founder-investor pairing can propel a high-growth tech company to unimagined heights while a bad one can hasten an unfortunate end.
VCs raise money from investors called limited partners and use the money to back risky startups. They make money when a startup has an “exit,” meaning it’s sold at a premium or goes public, which makes its shares tradable. (VCs also earn management fees, but those are paid by the limited partners.)
Early-stage investing is a high-risk game. Various reports peg the startup failure rate at between 60% and 90%. Regardless of the exact figure, for the VC model to work, the startups that succeed must make up for those that don’t. And given that the majority fail, the ones that make it must make it big.
How big depends to a large extent on the size of the fund a VC is drawing from. A $1 million investment that turns into a $5 million exit may be good for a $50 million VC fund but won’t move the needle at a $500 million fund.
That means a few things for the entrepreneur. First, if your business doesn’t have the potential for a 5x, 10x or even bigger return, venture capital is probably not the right route for you. Second, if you decide a venture investment is right for you, make sure you approach funds whose size make sense for the investment you’re seeking.
Most importantly, understand that when you take VC money, you’re committing yourself to a path of fast growth. You’re going to get a lot of money, but you’re also giving up a substantial amount of equity to one party. Unlike with angel or friends-and-family money, you’re going to lose some freedom in how you run the company.
Funden is an AI-powered investor recommendation tool. It saves you time by automatically generating a list of investors who invest in companies like yours. With over 50,000 verified investors and 10,000 investment firms on the platform, you’ll raise money before you can finish your next taco.
Each investor profile has a confidence score based on how likely they are to invest in your company along with their validated email address, social media profiles, investment preferences, thesis, and more. Finding & contacting world-class investors has never been easier.
Scared of AI? You can still search and filter through the entire Funden database.