When a venture capitalist takes the decision of investing in a small company, he or she does so after carefully studying the business plan for a period of up to 3 years. Generally the offers that enter this process are those that are different and innovative with a high potential for success. Venture capital funds follow a different set of rules than those established by banks. For instance, a venture capitalist will give great importance to the documents presented, the experience and profile of the entrepreneur, the idea of the business and the product it will offer to the market, and of course its innovative qualities.
Venture capital is obtained after going through a complex process. Depending on the kind of venture capital we are talking about, the investor may choose to buy shares (ordinary or preferred), or agree to receive advances on their bank accounts.
Venture capital is not intended to remain indefinitely invested in the company. Its intervention should be ad hoc and limited in time. The output can be achieved by: reduction or amortization of capital, the repurchase of securities by original partners at an agreed price, the resale of securities to a financial or industrial group, and by the sale at a capital development.
The capital gains that the venture capitalists obtain come essentially from the sale value of the shares they bought. The risks they take are: never being able to sell the shares, or losing everything if the company disappears.
You may be wondering, who are these investors? Well, venture capital can be given by angel investors, venture capital companies, or venture capital funds that help small business that have innovative or different ideas.
We present you here a list of factors that venture capitalists will take into account when choosing a company:
For investors what the company does and how it does it is important. They will want to know whether the business produces, creates, develops or recovers.
Status of the capital investment: public, semi public or private. The criteria for entry to the capital of a company can vary depending on the nature of the company that owns the fund.
Minimum and maximum amount granted: there is no need to contact a speaker funds from 1million Euros while your need for investment is estimated at 200,000.
The areas of funding are particularly important to venture capitalists because some may look for specific areas: technology, innovation, etc. As well, as if coverage is requested for a small or large geographic area.
By: Wade Henderson
Posts Tagged Venture Capital Funds
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
If your business is one of the many businesses that needs additional equity capital, then you have a basic choice: do you seek the expertise and capital of a financial or strategic investor? The two have very different implications.
Financial investors, broadly defined, include venture capital funds (for start-ups or companies early into their life cycle), angel investors (for small companies) and private equity funds. As the name implies, “financial” investors typically bring equity finance and expertise primarily of a financial nature, although many financial investors also pride themselves on bringing value-added knowledge in other areas, such as corporate governance, restructuring or sometimes even expertise in specialized sectors, such as logistics or food and beverages. Each financial investor will have criteria for eligible investments that are clearly set, such as geographic scope, minimum and maximum investment size or sectors of preference.
Strategic investors have an industry specialization and would include multinational corporations or mittelstand companies seeking to go international. Locally, there are an increasing number of CEE companies developing a strategy to acquire and grow throughout the region, which seem to an account for an ever-increasing proportion of overall CEE investment activity.
Whether you target a financial or strategic investor depends on your objectives. For example, my company has a client who insisted on a strategic investor, because he wanted to exit his business as soon as possible and didn’t want to stay on for the several years, as a financial investor would generally require. A different client insisted on a strategic investor because he had a very successful concept locally and wanted the cross-selling synergies of services that a strategic investor would bring. Another insisted on a financial investor because he had intellectual property to which he did not want a potential competitor to have access. Many clients will solicit interest from both strategic and financial investors.
Offering your business to a financial investor will typically take a higher degree of preparation. You will need to have an extremely thorough business plan with cash flows that may be relatively accurately forecast over at least a five-year horizon, including revenues, expenses and capital expenditures (capex).
Despite difficult financial market conditions, it is possible to find both financial and strategic investors, provided your business is sufficiently attractive and valuation expectations are realistic.
By: Les Nemethy