Venture capitalists often invest in startups with promising technologies and innovative products. They also take a significant share of the companies’ ownership and value. During their due diligence, VC firms employ entrepreneurs-in-residence (EIRs) to analyze potential deals. These EIRs are experts in a specific industry sector. This study demonstrates that EIRs help VC firms identify good deals.
Identifying Potential Deals
Venture capitalists, for example, Brad Kern, seek to invest in businesses that can generate significant sales revenues. In addition to showing a clear plan for achieving profitability, they want companies to demonstrate a large addressable market, a competitive advantage, and solid management team skills. The process of screening potential startups can be lengthy and time-consuming. An efficient customer relationship management (CRM) system that organizes conversations and tracks metrics can streamline the due diligence process. VC firms typically have associates who screen companies and present them to partners for consideration. These individuals may have prior experience in business consulting, equity research, or a degree in finance. They also often concentrate on a specific industry. VCs often prefer to invest in businesses that can benefit from their expertise in the industry, such as technology companies that help reduce operating expenses or improve productivity and efficiency. They are less interested in the early stages of an industry, where technologies are uncertain, and competition is fierce.
Investing in Startups
Venture capital is a necessary source of funding for new startup companies. Startups often have no other source of funds, and bankers typically will only lend money to startups if there are complex assets that can be used as collateral. Most startups require some capital to hire employees, rent facilities, and begin developing a product. Venture capital firms invest in promising startup companies in exchange for a percentage of the company’s equity. To make suitable investments, venture capitalists need to be able to quickly evaluate each potential opportunity and make swift go/no-go decisions on investment prospects. To help them do this, many VC firms employ “Entrepreneurs-in-Residence” (EIRs) experts in specific industry sectors. The EIRs research potential opportunities and perform due diligence on them. Other objective criteria VC investors look at include the strength of the startup’s management team and the size of the market opportunity. The larger the market opportunity, the better the VC’s chance of receiving high returns on its investment.
The success of startups often depends on the ability to manage them effectively. Venture capitalists provide mentoring and other management services to help startup executives grow their businesses. They also can facilitate access to other resources and knowledge that can benefit entrepreneurs. VC firms raise money from limited partners and invest it in startup companies with high growth potential. If the startups succeed, the VC firm earns its money back plus interest. Then, the VC firm can sell its stake in the company or give it to its investors, who may have earned a significant profit. A VC career is challenging and rewarding. Those interested in becoming a VC should have a strong background as an entrepreneur or executive and an MBA from a top business school. Those with a background in tech or healthcare typically have the best chance of finding and investing in promising startups. VC salaries are well below those of investment bankers and private equity managers, but they can lead to lucrative exits through IPOs or acquisitions.
Providing Strategic Advice
In addition to providing financial resources, venture capitalists offer counsel and support to help startups achieve growth. They may help them formulate a business plan or advise them on handling problems that arise during their expansion stage. They also provide strategic guidance and connections to other investors. They are particularly good at pattern matching, recognizing other businesses’ issues, and helping entrepreneurs find solutions. This experience enables them to help startups develop strategies for expanding into new markets, dealing with competing offers from other investors, and taking a company public. VC firms typically hire Entrepreneurs-in-Residence (EIR) with expertise in particular industry sectors. The EIRs perform the initial due diligence on a startup idea and then pitch it to their host firm. This process can take six to 18 months, after which the EIRs move on to executive positions at a portfolio company. The popular image of a VC as a sage adviser is at odds with the fact that they have financial incentives to manage as much money as possible, leaving little time for counseling entrepreneurs.