November 6, 2016

[Video] How does venture funding work? – Bobby’s Minute, ep. 46

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The answer to this question is very complex, but I am going to explain the fundamental principals of venture funding.

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How does venture funding work? This is the basic answer: somebody sees your company and they think that your company can be a great success. So, what they do is they come with a specific amount of money and they put the money in the company to be used by the company.

They don’t buy shares from the founders, they just add to the capital of the company so that the company can grow faster. Usually, there is a bit of confusion here because founders may be under the impression that when a venture capitalist comes and invests in the company, they basically buy shares from the founders and the money that the investors put in are going to the founders, but the truth is, the money any investors put in the company go to the company. Sometimes, the founders can take a small amount, but that’s not really common.

What happens to the shares of the founders? Well, they dilute, so, basically, the founders, after the investment, will have less of the company because the investors will also get some shares in the company. Obviously, the answer is more complex, but if you want to know more, you need to read about it. You need to talk to a lawyer and you also need to talk to a venture capitalist and to investors, to understand how they invest.

But the general idea is what I told you: people come with money, you offer some shares in the company and all the money enters the company to make the company bigger and better. Obviously, once the investors put money in the company, they’ll want at some point to take the money out and take some profits out of it and this usually happens when the company is sold or when the company has an IPO and that’s also the moment where founders make money out of the company.

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