The dynamics of venture capital are too complicated for a single post, so I’m going to list a couple of pointers that should enable a basic understanding of how they work:

VCs stick to markets they understand.

As investments in their domain begin to yield successes, VCs slowly begin to inch into other verticals and start experimenting. It is very rare for a VC to make a bet (because that’s what it is if they don’t understand the market) by investing outside of their comfort zone. The reason for this is simple: they’re not investing with their money. They’re investing LP money.

This makes it really hard for us eSports folks because—well, most investors don’t get it because this is a new industry and there aren’t any wealthy people who understand eSports. And that’s the case because eSports hasn’t made anybody wealthy yet!

Your business must go public or be sold for the VC to make his money.

Venture Capital is not a good option for service businesses because they seldom get purchased by competitors. Some service businesses do sell, but not at a level that will impact the success of a VC fund—and they are not interested in a dividend-based holding strategy.

However, venture capital is great for technology-oriented (like Web) startups. They are quick to grow, are purchased by competitors, and often command a sizeable return for their defensible technology. If a VC invests in you, they believe in you enough that they believe you will deliver a 10x return on their investment.

You will lose an increasing amount of control over your company

As time moves forward and as you keep raising additional rounds (to sustain growth), the shares you own in your company will slowly dilute (as you sell chunks of the business to investors).

I won’t get into the nitty-gritty of whether it is worth it for the entrepreneur, but a talented founder will learn over time how much to raise and when—and most importantly, at what valuation.

VCs are business partners

VCs are partners in your company. Their value is demonstrated through the generation of tangible value for the startup other than the cash investment. Strategic investors are the right investors because they can add a layer of value on top of their investment. And you only get that with an investor who gets your idea and shares expertise in your field. Which is a luxury we do not have in electronic sports.

Twitch enjoyed great momentum because it was able to ride the tech startup wave in the Valley—it just happened to have gaming founders. This gave it access to top-tier venture funds—and that comes with an incredibly powerful network that is more valuable than the money by an order of magnitude.

Here’s my money. I hope to see it back within 3-5 years, grown by 10x.

You have to give your investors their money back

When you sell your company, everyone who owns shares get paid based on the percentage they own and the purchase price. If I own 20% of a business being sold at $10M, I should get $2M right? It depends. Each additional round you raise places an additional investor in-front of you in line to get paid in an M&A event (such as an acquisition). If you happen to raise too much, it’s possible you will walk away with nothing after years of work.

They will sit on your board

A seed investment typically comes with a requirement for the lead investor to sit on the board. It isn’t rare for each additional lead investor in subsequent rounds to make the same requirement. This can be a good thing as it can be a bad thing. A VC on a board is fully vested and engaged. But if there is a lack of execution or synergy, things can go south real fast.

VC money is meant to be gasoline on a revenue fire.

When a company raises a round, it’s because it recently found a new way to make money profitably and needs more money to do it faster—there is no other reason. How much you should raise depends on your stage and how long you need to get to your next milestone.

There are three main stages to funding a company. Here’s a flyover:

A startup at the ideation phase should raise <$100K to prove their concept — this capital is referred to as pre-seed funding. It usually comes from a couple of angels who believe in the vision (as there is no product to show). A lot of accelerators are using this model by funding multiple companies at a time (in cohorts). The danger of raising over this amount is obvious: complacency, lack of focus, mellow budgeting, blah. Raise what you need to build a minimum viable product and prove your concept.

funding. It usually comes from a couple of angels who believe in the vision (as there is no product to show). A lot of accelerators are using this model by funding multiple companies at a time (in cohorts). The danger of raising over this amount is obvious: complacency, lack of focus, mellow budgeting, blah. Raise what you need to build a minimum viable product and prove your concept. A validated startup with proven traction can then raise a seed round, typically <$1M for web-oriented startups. You’re wondering, “woah, that’s a lot of money”. Yes, but that money is going into a proven system. The seed round’s purpose is to get to product/market-fit. I referenced it briefly in my last post.

round, typically <$1M for web-oriented startups. You’re wondering, “woah, that’s a lot of money”. Yes, but that money is going into a proven system. The seed round’s purpose is to get to product/market-fit. I referenced it briefly in my last post. Once the startup knows its customer, the value it creates, how it delivers this value (probably badly due to staying lean on funds) and how it will monetize, it raises a Series A round. This round typically ranges from $1M-$10M depending on the vertical and a bunch of other things. If you just found the cure for cancer and need to increase your production capacity to infinite, the Series A will be much higher. You get the point.

round. This round typically ranges from $1M-$10M depending on the vertical and a bunch of other things. If you just found the cure for cancer and need to increase your production capacity to infinite, the Series A will be much higher. You get the point. Once the company goes to revenue and ideally achieves profitability, it can choose to raise another round, this time a Series B (then C, D, and so on). Additional rounds are driver rounds. The gist remains the same: we know how to make money, we just need more cash flow to make it faster. But the company may be generating enough through revenue that it doesn’t need to raise more funds. That is an awesome situation to be in and is win-win for current investors and entrepreneurs alike.

(then C, D, and so on). Additional rounds are driver rounds. The gist remains the same: we know how to make money, we just need more cash flow to make it faster. But the company may be generating enough through revenue that it doesn’t need to raise more funds. and is win-win for current investors and entrepreneurs alike. The exit is the event during which the company is either purchased, merged with another company or goes public. In all of these events, the founding team and investors’ shares are cashed out (based on the percentage each owns and the purchase price). This is when the investor and founders are paid. When you accept a pre-seed investment, you commit to doing everything in your power to making this event a reality.

That’s a long breakdown! The point here is to realize just how long you commit to spending with the VC as a quintessential partner in executing the vision of the company, and that VC money is strategic money.