Venture Capital is a type of private equity that works on the basis of cash being invested into businesses in exchange for a share of a business. Venture Capitalists don’t however just offer their skills to a business; they also provide managerial and technical expertise.
Venture Capital is popular among new companies and new ventures. Many of these Venture Capitalists who invest in your business have a background in being chief executives at firms and investment bankers as well as connections with other firms in corporate investment and finance spaces.
Venture Capital is a viable source of financing for a business. Venture Capitalists have the option of investing at any stage of business, whether it is business start up or investing in an established business; however more typically than not a Venture Capitalist will invest in a more established and on going business.
When is comes to the type of businesses that Venture Capitalists invest in they are free to invest in which ever business sector they please, even though if you look at the trend of Venture Capitalists you will see that the main businesses that Venture Capitalists invest in are high tech such as research and development, electronics and gaming industries. Venture Capitalists also deal in large sums of money, which often run into millions of dollars.
Most Venture Capital arrangements have a fixed life of ten years and it should be noted that a Venture Capitalist isn’t suitable for all entrepreneurs; same as not all businesses get the opportunity to use the help of a Venture Capitalist. The Venture Capital market is very selective; a Venture Capitalist may only invest in one in 400 hundred opportunities that are presented to them, so if you want to attract a Venture Capitalist you need to have a well documented business plan and you need to be able to demonstrate how your business will be able to bring in enough capital after the help of a Venture Capitalist has been invested in your business.
If a business does posses the qualities that a Venture Capitalist is looking for, such as a solid business plan, a good management team, investment and passion from the founders, a good potential to exit the investment before the end of their funding cycle and target minimum returns in excess of 40% per year, you will find it easier to get a Venture Capitalist to invest in your business.
A Venture Capitalist will also consider aspects such as:
• Is your product or service commercially viable?
• Does your business have potential for sustained growth?
• Does your management team have the ability to use this potential and control the business through growth phases?
• Does the possible reward justify the risk involved in the investment?
• Does the potential financial return meet the investment criteria of the Venture Capitalist?
Almost three million people in the UK are employed by companies backed by venture capital, according to the British Venture Capital Association. Many of these companies might not be in existence without the injection of cash and guidance venture capitalists provide.
By: Helen Cox
Posts Tagged New Ventures
If you are thinking about starting your own business, your mind is undoubtedly full of questions. One of the most important questions will be: How am I going to raise the capital needed to get started?
Unless you’re independently wealthy, your financial support will come from outside sources. This financial support can be either from a loan, from banks or family and friends, or an investment resulting from the sale of stock in the new business.
Most entrepreneurs finance the early start-up stage of their business with personal savings. Service and Internet-based businesses, particularly, don’t require much capital and are often started with just the personal savings of the president and spouse. Personal borrowing from a bank is another possibility. Of course, this loan will have to be secured with a personal guarantee.
Other sources of financing are family, friends, and close business associates who are brought in as investors. You offer them the opportunity to buy a share of your company. With all investors, you should have formal, legal investment agreement to prevent disputes in the future.
There are many federal, state and local financial programs intended to encourage people to launch new businesses. The best place to start is to either contact or go to the web site of the U.S. Small Business Administration and get a listing of their programs for small start-up businesses. You’ll be able to get a description of each program and resources for each individual state.
Venture investors, whether individuals or venture capital funds, make their money by investing in start-ups. They usually have a lot of money available, but they are also very selective. There are three types of venture investors:
1. Individual venture investors, also known as “angels,” are wealthy individuals looking to invest personal money in new ventures. One of the advantages of turning to individuals is that they often decide quickly whether or not they are interested, without the bureaucracy or extensive investigation of more formal investment groups. On the downside, locating enough interested individual investors to finance your start-up can be difficult.
If you decide to approach individual investors, work with a knowledgeable lawyer completely familiar with the government regulations involved in this type of investment.
2. Institutional venture funds are usually limited partnerships in which the bulk of the money is supplied by passive limited partners, such as insurance companies or corporate retirement funds. The portfolio is managed by a general partner or group of general partners. These partners or groups have lots of money and because they are in the business of financing start-ups, they can be a valuable source of experience and expertise.
However, the process is very slow as the funds carefully examine all factors and risks. In addition, venture capital funds drive tough financial deals on issues such as determining what they will pay for your company stock. When you approach a venture fund, don’t appear desperate for money, because you may pay dearly for it.
3. Corporate venture investors are divisions of large corporations usually looking to invest in start-up companies in related business areas. One major advantage of raising money from corporate investors is that in addition to providing money, they can provide both technical and management expertise, and because they have goals other then pure financial gain, they may not drive as hard a deal as venture funds.
The major drawback: Corporate funds often want to eventually gain control of the company in which they invest, a condition you find unacceptable.
Your company will probably need some kind of track record before you should think about selling stock to the public. However, many start-ups have gone public successfully very early in their corporate lives.
Raising outside financial support for your company is a sales person’s job. Forget about being president of the company, an innovative design engineer, or whatever previous positions you held. You are now a salesperson, and what you are selling is your business, specifically, your idea for a product or service, your management team and your knowledge of the market.
Selling is a process with well established techniques. There are many books, audio programs and educational seminars that explain these techniques, from developing leads to planning and delivering your sales pitch to answering objections and closing the deal.
Read these books, listen to the audio programs, take the seminars and learn these skills. Otherwise, you won’t stand much of a chance in getting the money you need to start a business.
Copyright©2007 by Joe Love and JLM & Associates, Inc. All rights reserved worldwide.
By: Joe Love