Venture Capital (VC) is where an investing company provides
capital in the form of equity to a business that has the potential for huge profits in 5 years or less. Business loans are debt, like a mortgage. Equity investments are not loans, but are a purchase
of the company’s stock/shares. Venture capital is supplying the cash
required by the business in exchange (purchase) of stock.
Venture capitalists have typically been bankers, or highly successful executives. Venture capitalists manage the venture capital fund. The VC fund used for investments may be from a handful of individual investors, a larger group with funds coming from multiple sources, or large institutional firms such as insurance companies, pension funds, and Wall Street firms.
The venture capital fund is created to invest in companies that will deliver a high rate of return. VCs are looking to make money. These investments are not for philanthropy.
Since they are in business to make money on risky investments, they will perform extensive due diligence before making an investment, and they will generally only take a serious look at a company that meets their specific investment criteria. Like many funding companies providing business loans and cash flow funding, VCs will not invest in a wide range of industries. Even within the industries they are comfortable with, they will actually fund very few venture capital deals.
Venture Capitalists are looking
1. Companies within their investment parameters.
2. Equity ownership and maybe control of the company.
3. Businesses with high probabilities of exceptional profits.
4. Markets that will provide fast paced growth.
5. Well diversified and knowledgeable management teams.
6. Companies that will be in a position to go public, or be bought by a larger company, in 5 years or less.
7. Transactions of $1 million or more. Small deals just don’t offer the potential return they are looking for.
Even when there is growth potential Venture Capital firms seldom look to invest in businesses that are considered in the mature stage of their life. Although venture capital is often perceived to be “start-up capital,” venture capitalists rarely invest in a true start-up (pre-revenue) business. Early stage businesses would need an exceptional business plan, a fast growth product line, and current sales.
If a business owner has been turned down for a business loan and is looking for an equity investor to pay off previous debts, financially support the failing business, or put the business in a position where they don’t have to service debt, then the business owner is going to have an extremely difficulty time finding venture capital. Instead they should look for cash flow funding, and if the business accepts credit cards from their customers they can look at merchant account advances
The costs of obtaining venture
During the funding search, expect to pay due diligence fees. This separates the serious business owners from the day dreamers. If you are using a Consultant, CPA, or Attorney to assist in finding the right VC Funding Source you will also need to pay retainer fees and ongoing expenses. These professionals are not going to work strictly on a contingency basis. When funded, along with taking a piece of the company, the VC firm may also charge a management fee.
After funding, if the company has a business valuation of $5 million and the VC has contributed $1 million then
they own 20% of the company. There is a misconception that for a $5 million business a VC is willing to invest $4 million and only take 10% of the company’s stock. There are also day dream funding requests where a person has an idea, but no actual business developed, and
wants a VC to contribute the entire $5 million. This just is not going to happen. Business owners need to have their own capital invested and at risk, plus have the cash on hand to be able to pay the
costs of capital acquisition.
Finding venture capital funding sources is not difficult. However it is a laborious and challenging task to capture the attention of a VC, and even harder to actually receive venture capital for your business.
1. Research the venture capital funding sources and know where/if your business fits within their parameters.
2. Try to make contact with a VC through a referral.
3. Be concise in your business plan and presentations. Don’t have venture capitalists guess at how much capital you need, or how your business fits within their parameters.
4. If you believe in your business proposal and truly feel it fits in the VC arena then be persistent because you will hear “no” more times than you will like.
5. If you need quick cash, this is not the right avenue of funding.
6. Be realistic about how many hours you will need to work on this process to even get your transaction seriously looked at. Then expect to jump through many hoops. If a VC has an interest, expect 9-12 months of due diligence before funding.
Business Funding Secrets provides business lending secrets, tips, and techniques for business owners seeking business loans and venture capital. You
can access important business funding information when you vivt: www.BusinessFundingSecrets.com