Venture Capital Explained In Under 5 Mins

0:00hi i'm rob walling and i'm going to be explaining venture capital in less than five minutes i'm going to be talking about it from an entrepreneur's perspective so you can learn how to navigate it when it's best when to avoid it and even look at some alternatives to vc and if you stick around till the end i'm going to give you my very specific advice about how you should think about raising venture capital or whether you should at all i'm a startup founder with multiple exits the author of three books about building startups and an investor in more than 100 companies in a venture capital fund there are essentially two

0:31players there's the general partners and these are the folks that operate the venture firm so these are called gps and the gps go find limited partners the lps who are the investors in the fund the lps actually put money into what is essentially an llc if you're familiar with that structure in the us so how do venture capitalists make money they make money from two and twenty the two is two percent management fees so if you raise a ten million dollar fund usually you get a two percent or two and a half percent management fee and you get that for the life of the fund which

1:07usually is ten years so on a ten million dollar fund the management fees which are used to operate the fund itself to manage the gp to pay salaries that would be a total of 2 million over that 10 years then the 20 is the carried interest or carry as it's often called so back to our earlier example if you raised a 10 million dollar fund and after all your exits all the companies shutting down you had a total of 20 million dollars returned to the fun the first 10 million goes back to the investors to pay back their initial investment 20 of that goes to the gps so that would be 2

1:45million and then the remaining 8 million would go to the limited partners in essence a venture fund is a very risky endeavor and a lot of venture funds don't even beat the s p 500 they don't beat an index fund but something to know about the venture model is that out of every 10 companies a venture fund expects about four of them to fail about four of them to return their investment or a low multiple on that investment and then have one or two out of those 10 have a huge return like a 100x or a 500x return and that's had a not great effect on making venture capitalists only go

2:17after these massive massive markets and frankly they've started to ignore these smaller spaces that can still be life-changing for you as a founder but venture capital doesn't want anything to do with it so when is venture capital best when is it best to raise it it's best when you're in a massive fast-growing market that's winner take all and you're willing to do whatever it takes to be huge i think facebook amazon apple google big big companies that come in and just spend a lot of money and burn a lot of money and it's very risky 99 of companies shouldn't raise venture capital because you can build an amazing

2:5210 20 or 50 million dollar business and be considered an abject failure by a venture fund because they don't want a 10 20 50 million dollar business they want billion or billions in valuation because that's how they make their money recently over the past few years there's been other funding options that have come about one category of that alternative funding is called indie funding and that is where tiny seed falls in that's a venture fund and startup accelerator i'm the co-founder of tinyseed and it's where we don't need massive home runs to make the model work so we invest in sas bootstrappers where a 10 20 or 50 million dollar exit is not

3:31only life-changing for the founder but it provides adequate returns ample returns for our investors in my opinion this is essentially where the puck is moving it's not the venture is going away but venture funds around one percent or less of all startups that are starting in the world and so i view indie funding as startup funding for the other 99 and now i want to tell you my advice for thinking about raising venture funding or not as an entrepreneur but first if you've enjoyed this video please hit the like button below and subscribe to the channel we have tons of amazing content coming out on this

4:05channel every week we have some live streams we have these topical educational videos and we have conference talks from our dozens and dozens of of events that we've run over the past 12 years and now my advice for you as an entrepreneur build your business instead of your slide deck the best slide deck is an amazing business with traction i bootstrapped all of my startups before starting tinyseed including growing multiple to seven figures in revenue venture capitalists and angel investors they will start beating down your door to give you funding if that's what you want and if you have a profitable fast-growing bootstrap business that is the best

4:42position to be in thanks for joining me today i hope you enjoyed that summary of venture capital from an entrepreneur's perspective