Starting a business requires capital. If you are not a fan of traditional funding, or SBA loans or grants, there are other options. Finding a venture capitalist just might be the best option for you. This form of funding is often considered quite appealing(and glamorous even!) to small business owners and entrepreneurs.Known for being willing to fund companies in their early stages, many successful entrepreneurial companies owe their growth (in part) to financing received from venture capitalists. This type of financing comes from people who are not only able to provide business owners with money, but also invaluable advice, prestige and recognition. The mere fact that you've received money from venture capitalists means your business has true potential to grow rapidly and can often give you a larger head start.
In essence, venture capitalists make loans and equity investments.These loans are often quite expensive, however, as they can carry rates as high as 20 percent. Many venture capitalists will look for high rates, ranging between a 30 to 50 percent annual rate of return, so they can make a profit as well. Unlike other financing options, venture capitalists will usually take equity positions, meaning that owners do not need to pay cash in the form of installments and interest payments.Instead, they give their investors a percentage of ownership in the company. There is a catch though. Venture capitalists will often demand a significant portion of the company, meaning they gain significant control over the company.
Venture capitalists will not invest in just any company, however.Typically, they will want to invest in companies they believe will be sold to larger firms or to the public within the next few years. They often look for companies with the following attributes: a dominant position in a new, popular market; a proprietary new technology; rapid and steady growth; a solid team of managers; and the potential to betaken public or acquired by a larger company. Venture capitalists often use the "business life cycle" in order to define and select their investments. This life cycle consists of five parts: seed financing;start-up financing; second-stage financing; bridge financing; and leveraged buyout. Each investor will vary in the types of companies they want to finance, so you'll need to do your research. For instance,some investors want to provide money to companies in the early start-upstages, as this is a high risk (but potentially very high reward)period of time. Other venture capital firms will only look at companies in their second stage of financing or bridge financing, where they are able to help the company expand or go public. Lastly, some investors will choose to look only at firms who need money for buyouts.
There are a variety of venture capitalist firms to choose from:
Private venture capital is probably the largest source of financing, and they usually look for companies that are able to generate a 30 percent return each year. They will likely want to participate and contribute to the planning and management, but they also have a large amount of money (up to $500 million) that they can use to invest.
Industrial venture capital partnerships will often try to find companies that are very likely to succeed, usually high-tech firms or other companies that use technology in a new way.
Investment banking firms customarily provide funds for expansion, and some have also formed their own venture capital divisions to provide money for early-stage financing.
If you are interested in pursuing this route for financing, here are some tips and tricks for securing funding:
It is recommended that you contact venture capitalists through an introduction from an attorney, banker or business owner/professional that knows you and the venture capitalist well.
Make sure you have summaries of your company and business plan prepared, as this is what you will initially send to the venture capitalists (before the business plan). These should be compelling, as they are meant to develop further interest in your company. Outline the type of business, its potential for growth and the potential payoff for your investors.
Prior to meeting with any venture capitalist, it is imperative that your business plan is polished and ready to go.
Select your venture capitalists carefully, and make sure that geographic location, deal size and industry align with your business and goals.
Be sure you have a solid relationship with an attorney, as you will definitely need one with experience to help you make a successful deal.
Bottom Line: Venture capital can be highly valuable in getting funds for a high-riskstart-up, as it has the potential to provide you with not only money,but also experience and recognition. Just remember to proceed withcaution and keep your end goal in mind.
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