What do startups spend their first VC round on?

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What Startups Spend VC funds on
VC money can seem hard to get, but if you get it, how do you use it? (Image - Canva)

[This is a guest post from UK-based investor and startup CEO, Daglar Cizmeci]

There are more startups than ever these days.

As the e-commerce industry continues to boom and WFH remains a trend amongst the corporate sector, more entrepreneurs are using their funds to create new digital startups across a number of niches. However, from staffing to manufacturing, starting a business does not come without its costs.

This is where venture capital (VC) funding may come into play. Defined as “a type of private equity investor funding given to startups that have growth potential”, VC funds can play a significant part in business growth success and can cover startup costs.

Yet, for context, we should remember that less than 3% of startups are VC-funded.

VC Funding Boom (Chart: CB Insights)

Source: CB Insights

VC-based funding has boomed over the past decade, reaching a whopping US$753B worth of investments since 2009.

How do I get Venture Capital funding?

Venture capitalists are investment businesses, looking to invest their pooled capital fund into a mix of startups in exchange for equity.

VC funds are often managed by experienced business leaders, successful startup entrepreneurs and high stake investors that are able to offer funds and strategic advice for young entrepreneurs who may be “new to the game”.

For new, scalable startups, VCs can help lift a business off of the ground, and provide growth capital as well as access to the further equity market finance.

Venture capitalists are most likely to target a startup with significant growth potential, i.e, a business idea with a new angle for their niche market, or a unique product/service that is predicted to do well in today’s climate.

In order to receive VC funds you will ideally have a proven track record, traction, and a plan for success that venture capital investors are willing to invest their time and money into.

What are startups spending their first VC round on?

The average VC investment ranges from anything from $1million upwards and may be paid over a number of years as the startup continues to expand.

Over time (maybe 3, 5 or 7 or more years), the venture capitalists aim to make a return on their investment as the company grows, owning both a stake and some of the control over the company’s future.

Meanwhile, the startup is busy turning that money into a business that can repay its investment, and is likely to spend money on:

1. New Staff

Developing a strong workforce is vital if startups are to succeed. With large amounts of VC funding to spend on engineering, manufacturing and sales, business leaders first need to establish a team of specialists to assign to new increases in production and sales expansion both nationally and globally.

Hiring and training a more productive workforce will add value for the company. Utilising the knowledge and experience of great people should result in higher levels of production, in turn, increasing profits as the business continues to grow.

2. Developing New Products

With an average capital first-round investment of A$2 million, business leaders are able to put some of this money aside to collaborate with their VC funders and come up with new, unique product development ideas.

Encouraging business growth is all about creating new angles within a market. Using VC spending to aid product development is a smart investing strategy as this could put startups ahead of their rivals thanks to a boost in both planning and manufacturing-based resources.

3. Prioritising Marketing Efforts

Since the pandemic, 46% of business leaders are investing more capital into their marketing, in comparison to just 12% pre-covid. As businesses continue to move online, prioritising marketing efforts is vital if startups are going to cut through.

Smart marketers can invest more money into ad campaigns, social media content and SEO-based efforts. Raising engagement and brand awareness is a great way to increase sale rates and conversions, providing startups with more business in their new market.

The disadvantages of VC

While VC-based funding can be a great asset for startups looking to boost their rocket ship, some founders may be sceptical about giving away their control.

As private equity funding can often result in giving away a significant stake in return for sizable capital amounts, many VCs will also want to be involved in the decision-making process and may even veto ideas if they don’t like what they hear.

This can cause issues for founders. While VC funding may help you compete, potential loss of control or the need for a hasty exit opportunity may distract you from building that great business.

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Author – Daglar Cizmeci, is Chair of Mesmerize, a UK-based Virtual Reality and Augmented Reality product and technology company founded in late 2016.

Daglar is a serial investor, founder and CEO with over 20 years of industry experience in emerging tech, aviation, logistics and finance.

Graduate from the Wharton School and Massachusetts Institute of Technology (MIT), Chair at ACT Airlines, Vice-Chair my technic and CEO at Red Carpet Capital and Eastern Harmony, Co-founder of Marshfield’s, ARQ and Repeat App; Venture Partner at BOLD Capital Partners (Santa Monica, Ca).