Who’s Who When It Comes to the Venture Capital Ecosystem

Venture capital, in its simplest form, is financing provided from investors to companies looking to grow. Investors come in the form of high net worth individuals (HNWIs), angels, accelerators/incubators, VC funds and financing institutions. Investors invest, oftentimes money, and/or expertise in return for ownership interests in the company, with the hope of an out-sized return (the proverbial home run). Companies, particularly early stage ones, do not have access to traditional financing given their limited history.

Each player within the venture capital ecosystem plays a role in what has become an explosive industry. Depending upon which bucket you fall into, your responsibilities and goals differ.

1. Companies – incorporate, prepare private offering documents with terms for investors to consider (including type of offering, valuation, etc.) and try to grow to exit.
2. Venture Capital Funds – launch a fund, particularly with a thesis around which kinds of companies they seek to invest in, raise capital from investors, and then deploy that capital and, hopefully, secure returns over a 10 year lifecycle. If successful, Fund II is the natural evolution.
3. Investors – review and analyze which companies or funds to invest in, being mindful of not only ownership interests but also investor rights (e.g. tag/drag along, preemptive, information, etc.). Sometimes this is done individually or via an special purposes investment vehicle (SPV).
4. Accelerators/Incubators – create a focused program (e.g. tech, CPG, etc.), provide management, operational or other expertise to companies, and perhaps capital, in return for equity in the participating companies.

Regardless of where you fit, there are certain minimum requirements that require legal counsel to ensure that your interests are protected. Venture capital attorneys can assist with anything from due diligence to document creation to negotiation. Equally important, attorneys who are active in the VC space can provide perspective on what the market is and thus also serve as a valuable advisor.

Oftentimes, individuals cross-over amongst these various roles over the span of a career. Wherever you currently fit or may wish to fit within the venture capital ecosystem, it is important that you understand the motivations of those with whom you will be venturing.