Venture capital is a possible source of funding for new relatively unproven enterprises that appear to have promising futures. However, such money is often hard to come by.
Venture capital is a possible source of funding for newrelatively unproven enterprises that appear to havepromising futures. However, such money is often hard tocome by.
Be realistic in your quest for venture capital. Venturecapital firms expect a business to be able to return theirinvestment not only with interest, but with a large profit. Many venture capital firms are affiliated with banks,insurance companies, other financial institutions and largecorporations.
Some are owned by individuals or private groups ofinvestors and a few are publicly held. Once you acceptventure capital, you have relinquished some of yourautonomy and accepted the understanding that the venturecapital firm will take a large share of the profits youearn.
As an entrepreneur, you should understand the nature of avendor firm, before pursuing this as a financing source.This type of investor expects a projected return oninvestment that is directly related to risk. The greaterthe risk, the greater the return expected.
Typically however, an investment firm will not beinterested in getting involved with a new firm until thebusiness has established itself in some way, so the riskfactor can be determined.
The venture capital firm and its interest usually dependsupon the stage of the new firm's development. Once the newfirm has established itself and has a workingorganizational structure, a viable business plan andstart up arrangement, a venture capital firm may beinterested.
However, some firms prefer a later stage of new business development, perhaps when the new company is in its secondor third round growth state and needs more capital eitherto carry out expansion plans or to tide it over until a merger or public offering carries it to the next stage ofcorporate growth.
A company's business plan serves as the primary analyticaltool for the venture capitalist. In analyzing the plan, aventure capital firm would most likely focus on threefeatures.
The product or service. Investors seek product or serviceinnovations that give the company a strong competitiveadvantage. A new idea, backed by market surveys (measuringthe appeal of the product or service and its potentialmarket) may be tempting to such investors. Managementcapability.
No matter how good the product or how innovative theservice, the quality and experience of the management is akey factor in the success of the business.
The astute investor is well aware of this and looks forsolid evidence of such skill. The industry's growth.Investors also want to be sure that the product or serviceis in a growth field. A significant or revolutionaryproduct improvement, by itself, may not have appeal in adeclining product or service category.
Most venture capitalists purchase common or convertiblestock rather than burden the fledgling enterprise withinterest payments on debt or debentures. They may possiblywant more than 50 percent ownership.
Additionally, while the venture capitalists may insist onsitting on the Board of Directors or offering managementand technical advice, they are rarely interested in theday-to-day management of the business, unless its survivaland their investment is at stake.
Keep in mind that the minimum investment is generally from$50,000-$500,000, but investment ceilings are almostunlimited.
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