When seeking VC funding, start-ups have the right to carefully select the type of VC that fits their business goals and values. There are at least six different types of venture capital firms, which differ not only in terms of investment criteria, but also in terms of the source of capital, motivations, risk projection, levels of engagement, stage of the company, size of the investment and more. Start-ups need to identify their needs and find the best VC firm willing to support their company as intended. Below you will find the six different VCs at a glance:
1. Institutional VC
Institutional or traditional VC simply refers to investment firms which are backed by institutional investors such as financial institutions, banks, insurance companies, pension funds, university endowments, professional family offices, established companies or high net worth individuals (HNWI). These investors are referred to as Limited Partners (LPs), while the managers who manage the VC fund are referred to as General Partners (GPs). Their objective is usually financial gain, and they invest in companies with high growth potential in different stages. The engagement of institutional VCs in their portfolio companies ranges from medium to high. Examples include Sequoia, Andreessen Horowitz, Accel.
2. Corporate VC (CVC)
Unlike traditional VCs with many limited partners, CVCs or Strategic VCs are supported by only one corporation. They are typically independent wings of a company or subsidiaries of large corporations which handle strategic investments for their parent company. The source of funding comes from the company’s balance sheet. As CVCs are an extension of their parent company, they typically invest into start-ups that are operating in the same or complimentary industries. Their objective is not solely financial gain but also furthering their parent company’s strategic goals. They invest in early to mid-stage rounds and typically have a moderate to high engagement level, depending on the interests of their company. Perhaps due to the highly concentrated source of capital for most CVCs (100% ownership of investable capital), parent companies are often heavily involved in the day-to-day running of corporate venture funds.
Source: CBInsights
3. Government VC (GVC)
Government venture capital (VC) is a fund set up or fully backed by various levels of government to finance start-ups. The objectives are a mix of financial returns and the promotion of innovation, impact and economic development. The funds come from government budget allocations. The level of engagement to start-ups depends on government policy and priorities. It can be low to medium, with a focus on advice and support. Examples are The Illinois Innovation Venture Fund (INVENT) and The Small Business Innovation Research (SBIR).
4. Syndicate VC
An investment syndicate is a group of accredited investors who collaborate to invest in a specific start-up. The group agrees on the investment amount and terms, providing funds to support the growth and success of the start-up. Their goal is to make a financial return and they usually invest in early-stage start-ups. As they typically invest in many different companies in smaller ticket sizes, their engagement with the start-ups in their portfolio is low.
5. Family Office
Some family offices play an important role in investing in venture capital. Family offices handle investment management and wealth management for very wealthy individuals and families. The source of family office-backed VC funds is single-family or multi-family capital. The goal is financial return and to effectively grow and transfer wealth across generations. The degree of engagement over their portfolio companies depends on their alignment with family affairs and long-term strategy. They usually invest in early to mid-stage.
6. Micro VC or Angel Fund
Micro VCs or angel funds are typically smaller investment firms whose capital comes from a few wealthy individuals. They typically don’t have institutional investors or a diversified LP base. They invest in the pre-seed to early stage, and the investment amount is usually smaller than that of traditional venture capital firms. Due to their investment focus, they are categorized into high-risk, high-return investments. Micro VCs play an important role in bridging the funding gap as they make critical investments in early-stage start-ups that are often overlooked by traditional VCs. Notable examples include Lowercase Capital, which has invested in Uber, Instagram and Twitter. Lowercase was founded by Chris Sacca in 2010 with commitments of $8.5 million from Richard Branson and Eric Schmidt. The value of Sacca’s first Twitter fund, Lowercase Industry, has soared about 1,500%, returning approximately $5 billion to investors (Forbes).
Understanding Your Financing Options
Access to institutional VC funding offers start-ups the opportunity to benefit from extensive networks, expert advice, substantial financial backing across all stages of company growth, and to improve a start-up’s credibility and market validation. As the level of engagement is typically medium to high, founders need to consider the potential differences in priorities and objectives between founders and investors. Founders must also be prepared for the institutional VC’s exit projection, which may not always be aligned with the company’s exit plan.
Beyond financial returns, CVCs offer start-ups access to corporate resources, industry insights, and potential partnerships or acquisitions. For founders looking to leverage synergies with a larger corporation and gain market validation, partnering with a CVC could be advantageous.
Government VCs, backed by public funds, aim to stimulate economic growth and innovation by investing in early-stage start-ups. They often focus on specific sectors or regions targeted for development or social inclusion, like in the case of INVENT that offer financing for Capital Disadvantaged Business (CDB) owners and businesses owned and controlled by socially and economically disadvantaged individuals (SEDI). Start-ups seeking funding, along with government support and access to specialized resources or regulatory assistance, may find government VCs to be an attractive option.
Syndicate VCs allow start-ups to access diverse expertise, networks, and capital from a group of investors. Syndicate VCs offer flexibility in deal structures and sometimes participate in larger funding rounds. Founders seeking a syndicate of supportive investors and tailored financing solutions may opt for this collaborative approach.
While Micro VCs offer smaller investments compared to institutional VCs, Micro VCs provide nimble capital, personalized support, and a collaborative approach. Founders looking for early-stage funding and hands-on mentorship may prefer Micro VCs for their flexibility and agility.
Conclusion
In choosing the source of funding, founders must evaluate their financing needs, strategic objectives, and compatibility with potential investors. Each type of VC offers unique advantages and considerations, from capital size and industry expertise to strategic alignment and support offerings. By understanding the characteristics of different VC types and their implications for growth, founders can make informed decisions to secure the right funding partners for their journey.
