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Venture Capitalists – Are They A Good Idea For A New Company?

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Article Overview: You have your great business idea but it is going to take a load of money to get started so what are your options? Well Venture Capitalists are one source of funding, but you need to understand what venture funding might do to your company.

Venture Capitalists – Are They A Good Idea For A New Company?

You have your great business idea but it is going to take a load of money to get started so what are your options? Well Venture Capitalists are one source of funding, but you need to understand what venture funding might do to your company.

Venture capitalists invest on start up companies with big potential and high growth. They expect to collect their money, with a high return for risk, within three to five years. The normal way they do this is by taking your company to the stock market. A steep learning curve for any new company.

Venture capitalists usually invest in high technology companies or new product companies that show great promise in the near future.

In exchange for venture capital, which can often be sizable, a venture capitalist will get a share of your company and have a major say on the company's decisions. There will be a great deal of pressure to grow the company quickly but you will be receiving expert advice and the connections of a venture capitalist that has successfully done this many times before.

A person who has always dreamt of owning their own business and making their own decisions may find this a little uncomfortable.

There are some venture capitalists that specialise in providing financial services to start up companies with mostly an idea and a business plan in their hands. Venture capitalists are willing to make risky investments on businesses that banks loans and capital markets are afraid to make. They do, however expect to make returns that sometimes will make your eyes water.

Venture capitalists have the ability to pool in a large amount of capital as well as provide you with the benefit of their experience and industry contacts. Some venture capitalists use their own money, many bring in funds from pension funds, other industrialists and investors.

The idea of large injections of cash, combined with business skills may seem a very good idea for a starting company but there is downside to all of this. In the business world nothing is free and general partners require 20% upwards of the net profit of the company. They will also need a significant management fee every year. This is on top of owning a large portion of your company.

Despite these downsides it is not that easy to attract venture capitalists. They often have strict requirements. They will not invest on companies that don't have proof of their technology, full patents and the potential to grow extremely quickly. They will also investigate the current directors of the company to ensure that they are up to the job!

Usually 999 business plans get rejected out of 1,000. They can reject you for a lot of things that may even seem trivial at the time, but that is their greater experience in the amount of risk they will take for the return that they expect.

Before you find yourself a venture capitalist make sure you are aware of their impact in your company. You should always look ten steps ahead. Can you work under that kind of pressure? Will you be able to grow your company that quickly? Most importantly, will you be able to survive once the venture capitalist takes their profit and moves on to the next new business?

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Article Tags: business funding, business loans, business plan, venture capitalist



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Re: How I Started EvanCarmichael.com - Thanks Evan for this post. It is inspirational. Do you still have contact with those Venture Capitalists?
Re: need a capitalist to hear me out - If you have solid business plan, there are thousands of Angel Investors and Venture Capitalists that will fund your project. Google "Venture Capitalist" and you will get tons of investors who are ready to fund your project
Re: Seeking Investors For Downtown Victoria Development - Great - Google [i:hbs9217x]Venture Capitalists in USA[/i:hbs9217x] and you have thousands of them to choose from
Seek Venture Capital & Funding - Hello, Greetings from India. I am Seeking Venture Capital for Offshore Software Company Start-up. Need advise along with Business Model Sample. I have a basic outline for an offshore company. 1. Technology - like Microsoft Dot Net, Java, LAMP 2. Talent Team - Found Good Technology Developers. 3. Where I can get the leads/potential customers - Leads have been identified who are willing to move forward offshore projects. 4. I do not have resources like funding. It is a very critical factor to me Industries: Manufacturing, Real Estate, Retail, Insurance, Distribution & Logistics, Healthcare, Industry Associations and Software Product Development, Agricultural Industries and Etc. Services: Offshore Software Development Company. Offices to be located: Hyderabad, Andhra Pradesh, India and USA. Products/Services/Applications in areas like POS & Billing, Sales & Distribution, Production Planning, Material Management, Inventory Control, Plant Maintenance, Purchasing, Accounting and Logistics. Dynamic Web Programming with Database Driven Content Management Systems, Online Stores for E-Commerce, B2B Solutions, Community Portals, Website Redesign and Development, Custom ERP with Enterprise Wide Functional Modules such as Marketing, CRM, Accounting, Inventory Control, Sales & Distribution, Production Planning, Purchase & Stores, Logistics and Supply Chain. Seek your further questions and help. Thank you, Best Regards, Jayapratap.
How to valuate a business - Hi Garth - here is how we did it at Northern Crown Capital when I was helping them raise venture capital for Toronto-based entrepreneurs. Assume the start date is 2003 so 2008 projections are 5 years out: How Northern Crown Capital Valuates a Business 2008 Financial Projections Earnings Before Tax $5,865,000 Tax Rate 42% Taxes $2,463,300 Net Earnings $3,401,700 Amount Seeking to Raise Today $3,500,000 Discounted Value of Future Opportunity, 5 Years Out 2008 P/E Ratio 15 Value of Company in 2008 $51,025,500 Discount Rate Applied 30% Year 2008 $51,025,500 Year 2007 $35,717,850 Year 2006 $25,002,495 Year 2005 $17,501,747 Year 2004 $12,251,223 Value of Company at Investment in 2003 $12,251,223 Less: Investment Amount $3,500,000 Present Value $8,751,223 Discount for Risk & Private Company 40% Less: Discount for Risk & Private Company $3,500,489 Private Company Value $5,250,734 Present Value (What the Owner Keeps) $5,250,734 60.00% Financing (What the Investor Gets) $3,500,000 40.00% Total $8,750,734 100.00% I hope this helps!


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