Seed and venture capital

After the angels come the funds. Seed and venture capital is money on a different scale, and with a different logic, than a single angel. Understanding how a fund thinks is crucial — because their money comes with both high expectations and professional terms.

Seed, venture and later stages

Funds usually specialise by stage:

• Seed funds invest early, when there is a product and some first customers, but before the model is proven at scale. They take high risk against the possibility of high return.
• Venture funds come in once the company has shown that something works and is ready to scale. The amounts are larger, and the demands for growth and numbers clearer.
• Later stages (growth and buyout capital) are about accelerating companies that already have significant revenue.

Most founders first meet a seed fund. Knocking on a pure growth fund with an early idea is like applying to the wrong scheme — you get a no because you are in the wrong phase, not because the company is bad.

How funds make money

To understand an investor you have to understand their business model. A fund itself raises money from others — pension funds, wealthy individuals, the public sector — who expect a return within a certain number of years. The fund invests this capital in a portfolio of companies and makes money the day the companies are sold or listed (an exit).

The logic is fairly brutal: the fund manager knows that many of the investments will be lost or barely break even, and that the return must come from the few that succeed enormously. That is why they look for companies that could become very large — not solid small businesses, but those with the potential to multiply their value many times over. It explains why a fund can say no to a good, profitable company: if it cannot get big enough, it does not fit their model.

What it takes to be investable

Investable for a fund means something specific. They typically look for:

• A large market. The opportunity must be big enough to build a significant company.
• A scalable model. Revenue must be able to grow far faster than costs.
• Evidence (traction). Growth in customers, usage or revenue that shows something works.
• A strong team. The ability to execute and to endure a long, hard journey.
• A credible path to exit. The fund must be able to picture how they one day get their money out again.

If one of these is missing, the company is not necessarily bad — it may just not be a venture case. In fact, many good companies should not raise venture capital, because the model forces a growth-and-exit logic that does not suit everyone.

Term sheet concepts

When a fund wants to invest, they send a term sheet — a document outlining the terms before the final agreement. Some central concepts, explained simply:

• Valuation (pre-money/post-money): what the company is valued at before and after the investment.
• Ownership stake: how large a part of the company the fund gets.
• Liquidation preference: a right that gives the investor their money back first if the company is sold, before the other owners get their share.
• Option pool: shares set aside for future employees, usually established before the investment and therefore paid for by the founders in the form of dilution.
• Anti-dilution: terms that protect the investor from being diluted if a later round happens at a lower value.

These terms can matter as much as the valuation itself. We look more closely at the numbers in the next lesson, but the principle is: read the term sheet with professional help, because the details govern who ends up with what.

An example

A software company in Trondheim with good user growth receives a term sheet from a seed fund. The valuation looks pleasant, but the agreement has a strong liquidation preference. With a lawyer, the founders understand that in a moderate sale the investor would get most of it. They negotiate the terms, not just the price — and end up with a more balanced deal.

Do this now

Honestly assess whether your company really is a venture case. Write down the answer to three questions: Can this become a large company? Is the model scalable? Is there a credible path to exit? If the answer is no to one of them, you should explore other sources first — venture capital is powerful medicine, but not for everyone.