With almost unlimited opportunities the advancement in technology is creating in the last 2 full decades, many startups and small businesses today often seek for capital that may bring their dream business to success. While there’s a wide selection of financial sources that they may tap on, most of these entrepreneurs are hesitant in borrowing money from banks and financial lenders because of the risks involve. But positive thing is that they’ve found a good alternative and that is by raising venture capital from the venture capitalists or VCs.
Venture capital is that amount of money that VCs will invest in trade of ownership in a business including a stake in equity and exclusive rights in running the business. Putting it in another way, venture capital is that funding made available from venture capital firms to companies with high potential for growth.
Venture capitalists are those investors who have the capacity and interest to finance certain types of business. Venture capital firms fund administration services, on the other hand, are registered financial institutions with expertise in raising money from wealthy individuals, companies and private investors – the venture capitalists. VC firm, therefore, may be the mediator between venture capitalists and capital seekers.
Because VCs are selective investors, venture capital is not for several businesses. Like the filing of bank loan or asking for a distinct credit, you will need to show proofs that your business has high potential for growth, particularly during the first 36 months of operation. VCs will require your organization plan and they will scrutinize your financial projections. To qualify on the first round of funding (or seed round), you’ve to make sure that you’ve that business plan well-written and that your management team is fully ready for that business pitch.
Because VCs will be the more capable entrepreneurs, they wish to ensure that they may progress Return on Investment (ROI) in addition to a great amount in the company’s equity. The mere proven fact that venture capitalism is really a high-risk-high-return investment, intelligent investing happens to be the standard model of trade. A proper negotiation between the fund seekers and the venture capital firm sets everything within their proper order. It starts with pre-money valuation of the business seeking for capital. After this, VC firm would then decide on what much venture capital are they going to place in. Both parties must acknowledge the share of equity each will receive. Generally, VCs get a portion of equity which range from 10% to 50%.
The funding lifecycle often takes 3 to 7 years and could involve 3 to 4 rounds of funding. From startup and growth, to expansion and public listing, venture capitalists exist to aid the company. VCs can harvest the returns on their investments typically after 3 years and eventually earn higher returns when the business goes public in the 5th year onward.
The odds of failing are usually there. But VC firms’strategy would be to invest on 5 to 10 high-growth potential companies. Economists call this strategy of VCs the “law of averages” where investors believe that large profits of a few may even out the tiny loses of many.
Any company seeking for capital must make sure that their business is bankable. That is, before approaching a VC firm, they should be confident enough that their business idea is innovative, disruptive and profitable. Like some other investors, venture capitalists wish to harvest the fruits of the investments in due time. They’re expecting 20% to 40% ROI in a year. Apart from the venture capital, VCs also share their management and technical skills in shaping the direction of the business. Over time, the venture capital market is among the most driver of growth for 1000s of startups and small businesses around the world.