#1 HOW TO CREATE YOUR OWN VENTURE CAPITAL FUND AND UNDERSTAND THE STARTUP FUNDING INDUSTRY

Image by ANNA VITAL - ADIOMA

Before diving in « How to create your own VC fund ? », let me give you an over look of the business and its different cycles. Starting a company is a journey that often involves multiple stage of funding. In this article, we’ll walk through the stages illustrated in the image from the early concept phase to an IPO. We’ll explore how ownership changes over time, who the main players are in each phase, why equity is split in certain ways and how to create your own venture capital. 

The starting point of every startup is the idea stage, the stage where basically you kind of setting the « foundation » of the company and have clear view of the idea. The funding amount of the company is between 0€ and 5.000€ or more it depends there are no rules. And regarding the ownership, at this stage, the company is typically 100% owned by the founder with no external investors involved yet. The keys purposes of this stage is where the co-founders develop the idea, study the market and begin creating a prototype or a minimum viable product, usually called in the industry you’re MVP. 

During the idea stage, the founders hold all the equity, usually split between them (e.g., 50% each in a two-founder scenario). This phase is typically self-funded or funded through personal savings. The founders are responsible for all the initial work, from creating the business plan to developing early-stage versions of their product or service. At the idea stage of a startup, the founder’s approach is critical for setting a strong foundation for future growth and funding. 

There is a little funding phase between the idea stage and seed series that we called « pre-seed funding ». A these point the funders a seeking early support and basically it will comme from friends and family, generally called « Love money ». After proving the concept, founders often turn to friends and family for a small initial round of funding(around 10.000€ to 25.000€ ticket). This phase enables founders to gather funds with minimal dilution. However, because it’s still risky, family and friends typically receive favorable terms since they are the first ones to support them. 

Ownership might look like this after the round : Founder 1 holds 37.5%, Founder 2 holds 37.5%, and friends/family hold 20%. There’s also an option pool (5%), which is stock set aside for future employees, crucial for attracting talent early on.

At the Friends and Family round stage, a startup is moving from idea validation to initial growth and structuring. Founders often look to close friends and family for early financial support to help fund product development, market testing, and initial hiring. This stage is about building credibility, showing early traction, and setting the foundation for larger funding rounds. 

The seed round is the phase where the startup is focused on gaining momentum. As a Venture Capitaliste, you come in right here at the seed level. This is the playground of most VC companies and few Business Angels investors. This is where these guys play ! 

At this level, the funds raised are used to develop a market-ready product, expand the team, and prepare for the next growth phase. 

The seed rounds is the first significant external funding phase for a startup, marking a transition from initial concept validation to building a scalable business model. At this stage, the company has typically moved past the MVP (Minimum Viable Product) stage and demonstrated enough initial traction or product-market fit to attract interest from more professional investors, including angel investors, seed funds, and sometimes early-stage venture capitalists (VCs). This round is about gaining momentum, gathering the resources needed to expand the product, hire a foundational team, acquire early customers, and refine the business model. 

After the founders raise that seed round, they'll then do what's called a series A if they would like to. Then they can do a series B, they can do a series C and so forth. They can do a series A, B, C, D, E, F, G, H. They can do as long as they want. Typically they founder raise funds to a serie C, maybe an E and then they either hit this point where they're gonna sell the company and cash-out or go for an IPO. Obviously at each round of fundraising, the evaluation of the company is gonna go up higher.

For exemple at the seed round, the startup will have a million dollar valuation based on verified idea. And by arriving to series A, they have an €8 million valuation. At Series B, the founders got a company at €24 million valuation. By series C, they have €100 million valuation. 

At this point they can decide if they wanna sell the company or go for an IPO.

A lot of Venture Capitaliste funds will come in at a seed level, some will come in at A, B, C, and then a long as the private equity starts to get mixed in here. Private equity can come down as low as maybe a serie B or series A round if they want to. But typically they're not gonna play at these entry levels that often, it’s very rare because they seek companies that seek a large growth and market acquisition strategy. Private Equity are buying private ownership too. They're just doing it at a different time period.

Venture is looking for very early stage company investment. Private equity usually is coming in by a C round, maybe at this sell point, they'll buy in here and help that company scale, whatever their thesis is.

The thesis of venture capital companies can be différent between a fund and an another. If we get more specific about several VC strategy that we can find in the industry, some venture capitalists want to come in as a seed investment and they want to wait until the IPO of the company. They want to have a total unicorn valuation, the crazy investment with a €100 billion IPO for exemple. 

Some venture capitalists are a bit more settle and come on board at the seed round, but they want to exit by a series B. So they only want to be in from pre-seed, series A to B. These VCs are aiming a multiple of their initial investment. 

For exemple, They'll start at pre-seed and sell at B round at €24 million valuation with a 24X on their initial investment. With only that short period investment they are good !  They don't need to wait to get to a 100X or 1000X on their money. They came in at a million euro valuation. And sold it at a €24 million valuation. It's a win for the fund. They are going to take the chips off the table and move on the next investment. It all depends on their thesis ! So as a startup it’s very important to understand the VCs thesis before saying yes !

Hopefully we gave you a quick overview of the different stages of startup funding and where venture capitalist play their game. 

Now the next point that I want to touch and highlight on partnerships, the branding and the capital associated with it. You know, as a founder or a compagnie seeking funds, don’t think that you are the only one pitching during a roadshow...Venture capitaliste are also in a position of pitch you their brand and what comes with it, when the startup match their thesis. VC companies have capital for sure but they don’t just believe because they have capital that they're going to win deals, win partners and be able to invest in a lot of seed companies. As a fund raiser for your startup, you must have this in mind when you are talking to VCs.  

I have consumed a number of articles, contents and I’ve talked to few VC employees. And all of them told me that many of these tech companies that are well sought after are also looking for a strong partnership and branding that fit their business as they grow.

We can see the same thing happen on Shark Tank or « Qui Veut Être mon Associé » in France. We see two Sharks/investors with similar offers and the founders pick one Shark over another because of their reputation, their brand and their partnerships that Shark can bring. This has become more and more prominent. It’s the same in the VC industry ! The VC brand and partnership is more and more important every single day ! 

Now let’s dive in the big question. « How do I actually start a venture capital fund ?».

Traditional venture capital funds and the research I've done on them, a lot of the times it comes from wealthy individuals by themselves or entrepreneurs who cashed out their company. They usually start out as angel investors and invest personally into business they like and believe in. They'll start to get some wins and then they will start to say, « hey, you seem like a pretty smart person and you know what you're doing. Can you take some of my money ? » 

And they slowly will raise money from other wealthy individuals and just start to build their personal pot bigger and bigger where they can invest into more deals, more businesses and start to scale and grow beyond that to get into the VC business.

When you have nothing, you are starting from scratch the traditional route can seem impossible and only possible you’re already successful financially !

Starting from zero and launching your first fund will raise several question : « Should I start with legal documents ? or I don't know how to raise money ?, Where do I get investors from ? How am I gonna do this whole thing ? I’m I too young ? I’m I too inexperienced ? .... » 

Thousand of questions and mental brake will raise in your mind, it’s normal. But during my research, I notice that thinking this way is note the best way to create its own VC company. Let’s put a bit of perpective in all this. The best way to look at it is to bring something on table and then create the structure of an VC company, not the other way. Let us give an exemple. 

« We want you to imagine that we just found a Lamborghini Aventador or whatever. It's in London, UK. Beautiful car ! We've had a mechanic look at it, this thing is legit and in order. However, there's a lady selling it. She needs the money quickly ! She will sell the car to us for £50,000 by Saturday morning at noon. It's must be cash in the inner pocket, £50,000. She'll give us this car. 

On the other side, we have a verified buyer who also told us they'll buy the car from us for £200,000 Monday morning in Manchester.  Seeing the opportunity let's just go !  Let's go for it, right ? 

Now let’s say you cannot use any of your own money. But this deal is all checked out, the due-diligence came out clean. You're guaranteed, you and your investor, whatever, will make £150,000 by Monday morning if you can find £50,000 by Saturday morning at noon.

Think about it a minute, could you find £50.000 ? The investment is guaranteed (even if it’s never the case), all you have to do is raise £50,000 by Saturday morning. Think who would you call and reach out, your former bosses ?, college professors ?, friends ?, family ?, High-School friends ? and etc...If you worked hard enough and stayed up late you probably gonna raise 80, 90, £100,000 this weekend. 

Now you were just telling me that you were too young, you're inexperienced, you don't know anyone with money. And all of a sudden you're telling me you could raise $100,000 by Saturday morning. Why ? Because the deal is so good. It was so juicy. It is foolproof. It is 100% guaranteed. So you know nothing in life is 100% guaranteed, but if you can find things that you're that confident in, a lot of the concerns from raising money go away. »

The message here is, don’t focus on structuring the VC by getting the legal documents done, focus on developing a very qualified Deal-flow with business that generates you a lot confidence. 

Now another point, you got the right mindset with great startups to fund and you are lunching your roadshow to pitch potentiel investors. You must know, this industry is very highly selective with the entrance guarded by prestigious Business School and Universities. During your roadshow there'd always be the Harvard guy that had just pitched them before. And this Harvard guy had just been there and the Harvard guy will pitch the wealth investors like this. 

« Hi, Mrs./ Mr... . I'm from Harvard. I'm very smart. We theorize that over the next 24 months, we can find great deals and great properties or whatever it is to invest into and trust us because we're so smart and we comme from a great school. Say, great, that's a nice pitch. »

My research led me to fund raiser pitching like this : « Hey, Mrs./Mr., we're not from Harvard. However, we just identified this incredible deal. We can get these shares for really cheap. It's an incredible offering. You're smart. Look at the deal. You can run through all the white paper, everything you need to. If everything checks out, we need to close by the 30th, by the end of the month. If everything checks out, can we put you down for $500,000 in this deal ? »

Nine times out of ten, that investor would choose the second pitch over the nice Harvard guy who was theorizing on companies that they were going to buy or fund. This is because of your pitch, just like the Lamborghini example, you pitch the deal over the degree or School.

Now, at this point, and only then, once you have investors lined up in soft commitments, and then you go to your legal docs a stuff. 

Again, here is going to be soft commitments. This is not an official offer. This is just throwing this out here with people in the step three. Once it's all set up, go get your legal docs. You're going to go back and finalize everything with investors, get the money together, and put it together into the deal through a VC fund.

Does all make any sens for you guys, we hope we helped you somehow. Thank you very much for your support. 

Have a good one.