Philipp Wähler Session 2:

Postdoctoral Researcher Who invests in Ventures?

Mim – Entrepreneurial Finance 2025

& The Business of VCs

Yesterday, we discussed …

• What is Entrepreneurial Finance?

• Why do Ventures need to Raise Finance?

• What Kinds of Finance?

• On the Role of Milestone-based Finance!

Any Questions? ☺
Today

• Who invests in Ventures? Different Concepts

• What is Venture Capital (VC)?

• What is VCs Business?

• How do VCs evaluate Ventures?

Who invests in Ventures? Different Concepts ….

• Business Angels

• Banks

• The Fs

• Private Equity

• Venture Capital
Business Angels
Who are they?
Business Angels
Who are they?

• High-net-worth individuals who have been successful entrepreneurs

• They invest their own money in ventures

• Typically, aim to be active and support the venture in various ways (access to network, funding,
advice)

When do business angels commonly come in?

• In the “valley of death” after exhaustion of Fs, grants, and bootstrapping

• Commonly have a longer time horizon

• May be driven by individual interest rather than money

Bank Finance
Bank Finance
Bank Finance – the Basics
What do Banks provide to SMEs?
Debt
Loans
Is Bank finance more frequent than Venture Capital?
Yes, bank finance is available to SMEs in different industries, while VC focused on software, telecom,
biotech (from a survey from Berger & Udell, 1998)
Is Bank finance always better than VC finance?
Depends.
• Bank finance leaves us with ownership (no dilution), but no strategic advice and managerial support
• Bank loans dominate VC finance (superior incentive properties)
• VCs have strong preferences for ventures with high growth potential - compared to banks

Source Bettignies & Brander, 2007

Bank Finance
• Advantages of Bank Financing:
• Easily accessible

• Short-term debt finance

• Entrepreneurs retain control

• Problems with Risk Assessments by Banks (asymmetric information):

- Adverse selection (an a priori concern) : Imperfect information

- Moral hazard (an ex-post concern) : Clash of incentives between bank and client
Private Equity
Private Equity
• Private equity firms make investments on behalf of

their investors

• Target mature companies in traditional industries

(proven business models)

• Active involvement in operations, streamlining venture

• Aim to expand the business or merger, acquisition, or

management transition

• Provide commonly a large amount of money

($1,000,000 – $500,000,000)
The Fs: Family, Friends and Fools & Crowd
Are they even relevant?
How relevant are Fs?
What do you think?
Source: GEM
Source: Gartner, Frid & Alexander
(2012) in Small Business Economics
Source: Gartner, Frid & Alexander
(2012) in Small Business Economics
Source: Gartner, Frid & Alexander
(2012) in Small Business Economics
Venture Capital
What is their Business?
Venture Capital
In General
VCs play a crucial role in the startup ecosystem, serving as investors or firms that provide
financing to startups with high-growth potential

What are they investing in?

Ventures with promising and innovative ideas, scalable business models, and the potential for
high returns on the investment
… however, they can differ according to their investment decisions according to stages of
investment:

Some VCs invest in the Seed stage, Early Stage/ Startup or Expansion stage

After investing … (we will look at this one more closely at a later stage)
Monitoring function
VCs business – What do they do?

They manage the money of others ….

(these others are, for instance, investors, such as banks, pension funds, companies)

VCs are professional fund managers who are paid according to the returns they make for investors ….

… this is relevant because it drives their behavior

A VC is a financial intermediary

It takes investors’ capital and invest it directly in

portfolio companies (in return for equity).
Typically, a VC fund is organized as a limited
partnership:

• The venture capitalist is acting as the

general partner (GP) of the fund and the
investors acting as the limited partners (LP)
--- also called institutional investors.
Business Angels vs VCs

• Invest their own money vs fund managers in VCs

• They make their own investment decisions based on their expertise,
experience
Venture Capital vs Private Equity

VC Private Equity

Stage Seed/ Startup/Expansion Growth/Buyout/Replacement

Activity Sector Tech, Telecom, Media & Biotech Traditional business, consumer
goods, industry
Market Growth Two-digits 0% or GNP growth

Expected Return 50-60% annually 20-40% annually

Source: Alemany & Andreoli, p.100

The Economics of VCs: How do they make money?

The common Cycle of VCs Investments

Investment Divestment
Fundraising Period 5 Period 5
Years years
Finding Investors Investing and exit stage – selling stake
“limited Partners” Managing Portfolio

Buy very low & Sell very high!

Chapter 4: Duran & Farres in Entrepreneurial Finance, p.104
How do VCs source the best Deal?
What do you think?
VCs specialize on Industries …

Traditionally in two main sectors

• Health care / pharma / life sciences / biotech

• Information technology
• communications, semiconductor, software, and hardware industries
Investments by Industry – EU€
Investments by Industry– US 2013
How do they identify Opportunities within Sectors?

Define target areas and search …

• Number of sub-sectors within the fund scope

• Identify key innovators in the specific field
• Collaborate with these innovators and develop a plan
• Build a company from scratch

The core of opportunity identification is proactive behavior and focus

Whom do VCs rely on?

Their trusted sources and partners which can be …

… CEOs of existing/previous portfolios

…successful funders/ entrepreneurs

... Leaders in the industry

…other VCs
How do VCs choose deals?
Evaluation and Screening

… Screening criteria:
• Size, stage, location
• Alignment with portfolio

• Evaluation factors:
• Market analysis
• Management capabilities
• Intellectual property assessment
• Due diligence process
• Involvement of specialized consultants in later stages

90% rejection rate for business plans in early stages

What do investors look for?

• Potential for huge markets

• Top rate team

• Protected idea (IP)

• Ability to create value …

… and a clear path of achieving it

What do VCs consider in assessing Value Potential?

• Patents
• Clinical trials approval
• Brand
• User numbers
• Data
• Exclusive contracts
How do VCs assess Entrepreneurial Teams?

• Does the team possess necessary skills?

• Do they grasp the concept?
• Factors to consider:
• Experience (industry expertise)
• Track record (entrepreneurial success)
• Grasp of value creation
• Familiarity with VC model
• Ability to deliver an exit strategy is crucial
• Execution capability determines opportunity viability
What are common reasons for rejections?

• Distance from exit too significant

• Weakness in management team
• Limited growth potential
• Single-product focus
• Compatibility with existing portfolio
• Consideration of institutional memory
• Less than 5% of proposals receive backing
What do we need to know about VCs?

• VCs assess opportunities exclusively within specific sectors.

• They depend on their network for top-tier deal flow.
• The VC process is structured to swiftly weed out non-viable opportunities.
• Their emphasis lies on Value creation.
• They prioritize the exit strategy.
• They support top-tier ideas led by top-tier teams.
• Ultimately, the deal's pricing plays a crucial role in the decision-making process.
• VCs acknowledge the possibility of errors and adopt a portfolio management strategy.
What have you learned?
Some Key Takeaways

What are different sources of finance available to ventures?

What are Business Angels, 4Fs, Private Equity

What are VCs and how do they make money?

How do VCs source the best deals?

Up Next

Case: Palm Computing – Topic: Different sources of Finance

Tmr: Inequalities in Entrepreneurial Finance and Signaling

Thank you for your attention!