Venture Capital
What is Venture Capital? And how do you get it? So many
people have a misconception of venture capital and what
it actually is. Here are a few definitions to help you
get a better idea:
- Venture capital - high risk contributions made usually
to new and expanding companies
- Venture capitalist - a person or company that invest
in generally high risk business ventures
- Venture capital fund - a company that invests capital
accumulated by third party investors
Now that you know what venture capital is and where it
comes from, let us examine the different types and the
givers in order learn what has to be done to get it and
if it is the best choice for you..
Types of venture capital
Seed Capital--There are different kinds
of venture capital available for different stages of business
development. If you are a company still in initial development
stage you would most likely need seed capital. Seed capital
is usually for the purpose of marketing research and product
or service testing.
Start-up Capital--If your company has
already gone past the research and testing stage and is
ready to begin doing business then you are in need of
start-up capital.
Startup capital is mainly used for hiring staff, renting
office space, purchasing computer equipment, purchasing
inventories, building production system, and other activities
involved in starting the business.
Development Capital--If your company
is already gone beyond the start-up stage and has grown
to a point where the company needs to expand in order
to maximize profitability but does not have enough liquid
assets to make it happen, you are in need of development
capital.
Development capital is used to build or expand facilities,
hire additional personnel or just research new business
relationships and or business direction.
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Now that you are aware of the different kinds of venture
capital, you will be able to determine which of them your
company is in need of. Determining this early can save
valuable time when searching for the correct venture capital
lender.
The Role of the venture capitalist
Many tales have circulated about the "evil venture
capitalists" that sit and wait for innocent business
to fall victim to their unjust ways. Though bad deals
do happen, it is best to understand that they can be prevented
by necessary research and the execution of good business
practices.
The roles of venture capitalists are usually specific
to each situation. Possible roles are:
- directly providing funds for high risk, high return
ventures
- arranging additional financing from other sources
- assessing and revising the proposed business model
- reformulating the overall strategy
- finding and hiring key managers
- finding supportive service companies and other business
contacts
- firing existing managers when they think this is necessary
- buying-out existing partners (owners) when they think
this is necessary
As you got closer to the end of the list I’m sure you
might have cringed a little at the thought of being fired
in the best interest of your company. Well, let’s talk
about that a little.
Lets imagine that you are in a casino and you are about
to bet a million dollars on a game of craps but a stipulation
of that deal is that you cannot role the dice yourself.
Would you play?
Well assuming that there is some actual skill involved
in a game of craps, other than just throwing the dice
on the field, I’m sure you would prefer to be able to
throw the dice in a manner that you feel would render
the best results.
In the same way you would like to throw your own dice,
a venture capitalist wants to know that they still have
some control over the financial risk they are taking,
no matter how little. On the other hand some investments,
as difficult as they might be to attain, have no strings
attached.
When requesting venture capital it is important to understand
that even though you have a plan for the future of your
company, most venture capitalists have attained quite
a bit of experience from working with companies to achieve
success and are experts in their arena.
This knowledge is not something that is learned from
a class or college course. Instead it is something learned
from being in the industry and working alongside people
have gotten the information in a similar matter.
Know that most venture capitalists have extensive contact
lists of people and companies that can help your company
take the next major step. So, to determine the role of
a venture capitalist will have in your company you should
decide what your role will be.
One of the biggest mistakes some business owners make
is being afraid to pass the reigns on to someone who might
be more qualified to make key decisions. By all means
this does not mean you giving your company away. Instead
you are using your available resources to benefit you
long term. Whatever your situation, be sure to know what
you want for you company and what you are willing to compromise
before you make your request.
Venture capital fund operations
Because of the large risk involved, venture capitalists
tend to be very picky. Within their infrastructure there
are certain guidelines that a perspective recipient must
fall under. If you find a potential lender and are turned
away don’t stop there because each firm has their own
guidelines, and being declined by one does not mean you
will turned away by all of them.
Keep in mind however that most venture capitalists are
not looking to be long term investors. Instead they choose
companies that have some promise to grow rapidly.
If you do not see your company being capable of generating
the expected returns within 3-10 years, you might want
to reconsider seeking venture capital funding.
Back to the point mentioned in The Role of Venture Capitalists,
venture capitalists usually expect to be able to assign
personnel to key management positions they like. They
typically also obtain one or more seats on the company’s
board of directors.
This is to put people in place, an action that sometimes
has quite unfortunate implications as it was used in many
accounting scandals to refer to a strategy of placing
incompetent or easily bypassed individuals in positions
of due diligence and formal legal responsibility -thereby
enabling others to rob stockholders blind.
Only a tiny portion of venture capitalists, however,
have been found liable in the large scale frauds that
rocked American finance (mostly) in 2000 and 2001. Bottom-Line?
Be careful.
So what have we learned?
We learned that even though venture capital can be viable
solution for your company needs, but as with anything
it comes with a price. You have to take the time to think
about the direction of your company, and if you are willing
to pay the price. Good Luck!
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