Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
As a startup, it’s helpful to understand the VC investor you are talking to and how they make money.
In venture capital, there’s two ways to make money.
First, VCs typically take one third of the equity for their investment.
In rough numbers, the VCs take the amount to be raised and double it for a pre-money valuation. The VC receives equity ownership of investment, divided by post-money valuation.
As an example:
Say you are raising $1M. The VC will turn that into a $2M pre-money and then add the $1M investment to reach a $3M post-money valuation. The investor receives Investment divided by the post-money which is 33% of the equity. That’s how much equity the startup gives to the VC for the funding.
Second, the VC charges their investor, called Limited Partners, a fee and carry — most often 2% fee and a 20% carry.
VCs have limited bandwidth and can only take on a certain number of deals. They look for startups that will agree to these terms as it prioritizes the most profitable deals to pursue.
The better the deals they attract, the more they can charge their LP investors.
Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.
Let’s go startup something today.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.