Amaury Sepulchre is a partner at Startup Studio Hexa.
The studio having created more than 40 companies, including 3 unicorns (Front, Aircall, and Spendesk), he knows what raising funds means, early stage (when the companies are in the studio) and later (as a board member).
In this article, he starts from the basics: who are the different types of investors, and zooms on one of the most crucial ones to understand as a founder: the VC firm.
Introduction
As a founder creating a company, one of the first questions you need to answer is whether your project can be bootstrapped (profitable from day one, it can be launched without raising external money), or requires raising funds.
If you plan on raising funds, you should know what a Venture Capital firm is, how it operates, and what its business model is.
Different Types of Investors
The first thing to understand if you’re planning to raise is that not all money is the same. Or rather not all strings attached to it are the same.
Here are the different types of investors you may encounter:
VCs (Venture Capitalists)
VCs manage other people's money and usually come into play in the early and growth stages of your startup. They're looking for high returns and are generally hands-on, often asking for board seats.
Example: Sequoia Capital, Andreessen Horowitz, Index Ventures, Partech are all VC firms.
Sometimes, you will hear about “Micro VCs” or “Solo-GPs”.
A “Micro VC” is a fund managing less than 50M€, typically only investing in pre-seed and seed opportunities.
A “Solo-GP” refers to the size of the team of the fund: only one General Partner, sometimes helped by analysts.
Example: Gloria Bäuerlein’s Puzzle Ventures is a Solo GP.
Business Angels
These are wealthy individuals investing their own money, typically in the early stages of a startup. They may provide more than just capital, like mentorship, but usually have less money to invest than VCs. They are often a lot more hands-off than VCs.
You will sometimes hear about “Super-Angels”. Where you drwa the line with regular business angels is a bit arbitrary. They are “super” because they are wealthy enough to write large checks (50k€-500k€), have a large portfolio of investments, and/or are willing to lead a round.
Example: Thibaud Elzière or Eduardo Ronzano are famous French Business Angels
Angel Syndicate / Community
An angel syndicate is a group of Business Angels who agree to source, evaluate, and invest in deals together.
Example: Hexa has an investment community open to its alumni and employees.
Family Offices
These entities manage the wealth of affluent families and might be interested in diversifying into startups. They can be hands-off but offer significant funding amounts.
You will hear about “Multi Family Offices” if the Family Office manages the wealth of several families.
Example: Otium Capital is the Family Office of Pierre-Edouard Sterin
PE (Private Equity)
These guys usually come in later and might even buy out your company. They use both their money and leveraged capital to make large-scale investments. They are typically very hands-on. Learn more about it here.
Examples: KKR is a large-cap US PE firm, Montefiore is a mid-cap French PE firm
Public Asset Managers
Think of mutual funds or hedge funds that are open to the public. They usually invest in public companies but are increasingly exploring private investments.
LPs (Limited Partners)
These are often institutional investors, such as pension funds, insurance companies, or educational endowments.
Sometimes, they can be High Net Worh Individuals or Family Offices.
They're the money behind the VC and PE firms, investing in their funds but not directly in the target companies.
Scouts
These are individuals hired by VCs to find promising startups. They're your boots-on-the-ground people, and impressing them could get you in front of big VCs.
Example: Jason Calacanis or Roxanne Varza for Sequoia Capital
How do all these people interact together?
As an example, Aircall, an eFounders company raised its seed round with several Business Angels, like Oleg Tscheltzoff.
It then raised money from several VC funds, each specialized in different stages, such as Balderton for Seed, or Goldman Sachs Asset Management for its Series D.
The full detail is available on Crunchbase.
What is a VC firm and what is a Fund?
A VC firm is an asset management company that specializes in a certain type of deal: investments in startups.
They manage other people's money, with the team behind this being called "General Partners" or "GPs." These GPs decide how the money is invested, often within a defined investment strategy.
The money they invest comes from Limited Partners, or LPs, who can be rich individuals, family offices, or even institutional investors like insurers.
A given Venture Capital firm is a fund manager. It oversees one or several funds.
These funds are independent legal vehicles, that may not share the same LP base and can have different documentation.
A VC can manage several funds, both sequentially and in parallel:
- Funds with the same investment scope but launched at different dates will be called different “vintages” e.g. Partech Seed IV
- Funds with different scopes that can be run in parallel, segmented by Stage (Early/Growth), Strategy (Secondary), geography, or sector
Examples of VC and Fund sizes
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The most famous VC firms have a total AUM of billions of dollars, split across several funds.
For a given fund, the typical size will vary based on the stage they invest in:
- Micro funds: 2-50m$
- Seed fund: 20-150m$
- Early stage fund: 50-500m$
- Growth fund: 200-2bn+$ fund
The Economics of VC Funds
How do VCs make money?
Well, they have two primary ways to do it:
- Management Fees: Usually around 2% charged annually on the total fund amount.
- Carried Interests: This is where the real money is. They take around 20% of the profits made from investments.
The Investment Cycle
VC funds have a cycle.
They first need to structure and close their fund, before going into the investing phase.
Once closed, funds often have a lifetime of around 12 years, separated into different phases, which can overlap each other.
- Investment phase: years 1-5. Funds source deals, evaluate them, negotiate terms, and invest.
- Double down phase: years 3-8: Funds will often reserve some funds to double down on some of their portfolio companies.
- Exit phase: years 6-12. The better-known part of VC is investing, but this is the phase where profits are realized. The fund will sell its participation in portfolio companies, either via an IPO, an M&A transaction, a shares buyback, or a secondary sale.
How VC teams operate
VC are usually organized as small teams (5-15 people), with a hierarchical structure:
Analyst, Associate, Principal, Director, Partner, General Partner
Partners will typically specialize by sector and/or geography.
If you raise funds with VCs, you will usually go through a few meetings, during which the investment team will ask you all they need to know to form an opinion on your business and prepare an investment memo.
The full partner committee will then take the decision.
For the anecdote, different VC firms have different voting rules and spend a lot of time trying to improve their decision processes. For instance, unanimity can be seen as a bad sign in some firms, as outliers shouldn’t make the unanimity.
And the performance of a fund will be mostly driven by outliers. Let's discuss why.
Drivers for VC performance
VC deals performance is driven by the mythical Power Law.
It’s important for you to understand this because it explains why VCs are only looking at certain types of companies.
Most startups will fail and return less than the money invested. Even for the best funds in the world.
However, some startups will win big time, and they will be the main drivers of the fund's performance.
Knowing that this explains why VCs will take time to understand if your company has the potential to become a billion-dollar company.
The next two slides from Horsley Bridge and Andreessen Horowitz clearly show why.
What about post-investment?
The role of VCs post-investment will depend on several factors, including whether they have a board seat.
Typically they:
- Will join the board (especially early-stage) and work on strategy, handling major issues, reviewing your financial plan, etc.
- Help with business and recruiting introductions
- Coach the founding team
- Help prepare for your next round or an exit
Lately, some VCs have started offering operational help to the startups they invest in, with recruiting, sales, finance, or PR teams they make available to them.
Key things to look out for
As a founder, it’s important that you understand a VC’s business model and incentives, which are different from yours.
Here is a list of things we think are important to know:
- Understand how many investments the partner you’re talking to will make. A partner with 6 investments will be able to dedicate more time to you than one with 15
- VC returns come from home runs. They will push you to take risks, to become a “fund returner”. It’s really a go big or go home strategy.
- At the same time, VCs are diversified, while you are not: pay attention to the level of risk to which you’re willing to expose your company.
- VCs will invest with Preferred Shares. When you negotiate your Term Sheet, know what rights they have!
- VC funds are closed-ended. They will need to exit at some point. Understand how much time is left before the liquidation of the fund, as they will push for an exit as you get closer to it.
Conclusion
Venture Capital is a complex world. As a founder, understanding how VCs work and their incentives is crucial, if you want to raise with them.
Now, go prepare your pitch, and good luck!
To go further
[1] The Power Law, Sebastian Mallaby
[2] 20VC Podcast
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