Venture capitalists (VCs) are investors or groups of investors that privately fund new companies, usually in the technology sector. In exchange for financial support (called Venture Capital), they often require some control over company operations. Their contributions, in the form of financial support, business management experience, networking contacts, etc., add value to the companies they invest in. The following list outlines some of the specific roles of venture capitalists involved in the development of a startup.
Identifies Suitable Companies for Investment
Innovative, industry-leading technologies being developed under good management with potential for growth and commercialization, are some of what VCs look for in a company. The VC can foster innovation by providing the financial backing for development of new ideas, and this may also give companies some flexibility to broaden their research and pursue different avenues of research, thus enhancing their chances at success.
Identifies Value Drivers
A VC with experience in biotech and business development can assist companies in identifying and developing value drivers. This means identifying where to steer corporate growth, and helping prioritize and allocate resources, based on what they believe will add the most value to the company. Statistically, participation of a VC in the operations of a business, significantly increases the probability of a product making it through the pipeline to the market.
VCs usually get a say in how the company is run, thus their role is to cooperate with the company founders/ owners in determining operational milestones. Possible milestones include patent acquisition, technology licensing, and reaching the stages of animal or clinical trials.
The milestones must be achievable and it is important that the partners see eye-to-eye, agreeing on their defined objectives and priorities without either feeling restricted or in disagreement with the other. Without a strong relationship and effective communication, the resulting friction can hurt the company as concerns that funding may be withdrawn may circulate. Company founders can "shop" for a VC to find the best match for them.
Develops a Strategic Plan
The VC usually has some sort of term in mind limiting the duration of their involvement with a company. They want a return on their investment within a period of time and will plan an exit strategy based on the milestones set out in their agreement with the company. The VC helps establish a strategic plan for each step of in the growth of the company using the milestones as markers. The culminating result is most often a major event such as an initial public offering (IPO) or acquisition, within 5-7 years.
Ensures Company Professionalization
The VC helps to professionalize a company by identifying and recruiting competent Board and management members. Although the VC is involved in the overall corporate plan, this ensures that the company is being managed on a day to day basis by professionals with experience and business know-how.
Startups are often founded by scientists who have extensive research experience from obtaining a Ph.D. followed by years of R&D work, but little or no business background. In many cases, the founders of new biotech companies are replaced by a new CEO. The founder might remain on staff as the Chief Technical Officer (CTO), in other positions, or on the Board of Directors.
Provides Networking Opportunities
The VC can help a company plan for its future by identifying and establishing sources of later financing. VCs are business professionals who should be fairly well connected through networking with other potential investors and advisors. They can use these connections to help establish their companies in the marketplace by making introductions to technology-collaboration partners throughout their networks.
Monitors the Competition
VCs are experts in business investing and are generally well versed in the development of other companies. They have done their research before investing, therefore are aware of the competition and what stage their R&D programs may be at. A continued vigilance is important in the rush to have IP established, obtain new drug approval, and make it to the marketplace ahead of the competition.