Venture Capital Knowledge Base

Introduction to Venture Capital

Venture capital (VC) is a type of private equity financing that fuels startups and early-stage companies with high growth potential. VC firms invest capital in exchange for equity ownership, often providing strategic guidance, industry expertise, and networks to help businesses scale. Unlike traditional loans, VC funding is ideal for innovative companies that lack immediate revenue but promise significant returns through exits like acquisitions or initial public offerings (IPOs). At Raphael Group (RG), we bridge the gap between these high-growth startups and strategic investors, making this knowledge base a vital resource for understanding the VC landscape.

Key Concepts in Venture Capital

  • Equity Ownership: Investors receive a percentage of the company proportional to their investment and its valuation.

  • Valuation: determines a startup’s worth. Pre-money valuation is the value before investment; post-money valuation includes the new capital (e.g., $5M pre-money + $1M investment = $6M post-money).

  • Term Sheet: A non-binding document outlining investment terms, including funding amount, equity stake, and rights like voting or liquidation preferences.

  • Due Diligence: The investor’s investigation into a startup’s team, financials, market, and risks before committing funds.

  • Capitalization Table (Cap Table): Tracks ownership stakes of founders, employees, and investors across funding rounds.

  • Exit Strategy: The plan for investors to realize returns, typically via acquisition or IPO.

Types of Venture Capital Investors

  • Seed Stage VCs: Fund pre-revenue startups with $50K-$2M to validate ideas and build initial products.

  • Series A/B/C VCs: Invest $2M-$50M+ in scaling companies with proven traction and revenue.

  • Angel Investors: High-net-worth individuals investing $10K-$500K personally, often in early stages.

  • Corporate VCs: Divisions of large companies investing for strategic alignment, not just financial gain.

  • Family Offices: Wealth management entities diversifying into startups with flexible investment sizes.

Essential VC Metrics

Revenue and Growth Metrics

  • Annual Recurring Revenue (ARR) is annual subscription revenue. For example, $1M in monthly subscriptions equals $12M in ARR, which is critical for SaaS valuations.

  • Monthly Recurring Revenue (MRR): Monthly subscription revenue. Example: $100,000/month = $100,000 MRR. Tracks short-term growth.

  • Net Revenue Retention (NRR): Retained revenue from existing customers, including upsells. Formula: (Current period revenue / Prior period revenue) * 100%. Above 100% signals strong retention.

  • Churn Rate: Percentage of customers lost. Formula: (Lost customers / Total customers) * 100%. Example: 5% monthly churn = losing 5% of users monthly.

Table: Revenue and Growth Metrics

Revenue and Growth Metrics

Customer Metrics

  • Customer Acquisition Cost (CAC): Cost to gain a customer. Formula: (Marketing + Sales Spend) / New Customers. Example: $50,000 for 500 customers = $100 CAC.

  • Customer Lifetime Value (CLV): Revenue from a customer over time. Formula: (Avg. Revenue * Lifespan) - CAC. Example: $50/month for 2 years - $100 CAC = $1,100 CLV.

  • LTV/CAC Ratio: Efficiency metric. Goal: 3:1 or higher. Example: $1,000 CLV / $300 CAC = 3.33.

  • Conversion Rate: Percentage of leads becoming customers, reflecting sales effectiveness.

Table: Customer Metrics

Customer Metrics

Product and Market Metrics

  • Daily Active Users (DAU) / Monthly Active Users (MAU): Engagement frequency. Example: 10,000 DAU / 50,000 MAU = 0.2 ratio (20% daily usage).

  • Activation Rate: Percentage completing a key action (e.g., onboarding). High rates indicate usability.

  • Product Stickiness: Repeat usage frequency, measured by retention or DAU/MAU.

  • Market Penetration: Share of total addressable market (TAM). Formula: (Revenue / TAM) * 100%. Example: $10M revenue in $1B TAM = 1%.

Table: Product and Market Metrics

Product and Market Metrics

Financial Metrics

  • Burn Rate: Monthly cash spend. Example: $500,000/month. Signals sustainability.

  • Cash Runway: Months until cash depletion. Formula: Cash / Burn Rate. Example: $6M / $500,000 = 12 months.

  • Return on Ad Spend (ROAS): Revenue per ad dollar. Formula: Ad revenue / Ad cost. Example: $5 revenue per $1 = 5 ROAS.

  • Cost Per Lead (CPL): Cost per lead. Formula: Marketing spend / Leads. Example: $10,000 / 1,000 = $10 CPL.

Table: Financial Metrics

Financial Metrics

Valuation and Investment Metrics

  • Pre-Money vs. Post-Money Valuation: Pre-money is pre-investment value; post-money adds investment. Example: $5M + $1M = $6M.

  • First Chicago Method: Valuation using weighted scenarios (best, base, worst). Example: 20% chance of $50M, 50% of $20M, 30% of $5M = $21.5M weighted value.

  • Liquidation Preference: Investors’ payout priority in exits (e.g., 1x = investment returned first).

  • SAFE Note: Converts to equity later, often with a discount, simplifying early funding.

Table: Valuation and Investment Metrics

Valuation and Investment Metrics

The Fundraising Process

  1. Preparation

    • Craft a pitch deck: problem, solution, market size, business model, traction, team, funding ask.

    • Build a financial model with revenue projections and runway.

    • Target aligned investors via RG’s network.

  2. Outreach

    • Use warm introductions or apply at raphael.group/apply for curated investor matches.

    • Tailor pitches to investor interests.

  3. Pitching

    • Deliver a 10-15 minute story with data (e.g., $2M ARR, 10% MoM growth).

    • Address market opportunity and competition.

  4. Negotiation

    • Review term sheets for valuation, equity, and control terms.

    • Consult legal experts to protect interests.

  5. Closing

    • Finalize agreements post-due diligence.

    • Receive funds and begin a growth partnership.

Common VC Terms

  • Runway: Time until cash runs out (e.g., 12 months at current burn).

  • Burn Rate: Monthly spending rate (e.g., $500,000).

  • Churn: Customer loss rate (e.g., 5% monthly).

  • Liquidation Preference: Investors’ exit payout priority (e.g., 1x or 2x).

  • Pro Rata Rights: Option to maintain ownership in future rounds.

How RG Fits In

  • Investor Connections: Matches startups with VCs, angels, and family offices who bring capital and expertise.

  • Fundraising Support: Refines pitch decks, models, and outreach strategies for faster raises.

  • Growth Advisory: Provides post-funding strategies to maximize value.
    Start today: Apply at raphael.group/apply or book a 30-minute investor consultation at raphael.group/investors.

Tips for Startups Seeking VC

  • Prove Traction: Show revenue (e.g., $500K ARR), user growth, or partnerships.

  • Define Market Size: Highlight TAM and why it’s ripe for disruption.

  • Build a Strong Team: Emphasize expertise and cohesion.

  • Seek Strategic Fit: Choose investors with industry knowledge, not just funds.

  • Leverage RG: Use our platform to access vetted investors and expert guidance.

Advanced Valuation Insight

The First Chicago Method blends scenario analysis for valuation: assign probabilities to best-case (e.g., $50M at 20%), base-case ($20M at 50%), and worst-case ($5M at 30%) outcomes. Weighted value = ($50M * 0.2) + ($20M * 0.5) + ($5M * 0.3) = $21.5M. Ideal for early-stage uncertainty.

Resources for Further Learning

This VC knowledge base equips startups and investors with the tools to succeed in the funding ecosystem. Whether raising capital or seeking opportunities, RG is your partner in building impactful connections. Explore our services to accelerate your journey.

Explore the Legal Side of Venture Capital
Dive deeper into the legal frameworks shaping VC investments, from SAFEs and convertible notes to equity rounds and key terms. Visit our Venture Capital Legal Knowledge Base for a comprehensive guide to structuring deals and managing risks.