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Venture Capital. What is it?

Written by: Rick McCoo

Article Overview: Venture Capital is money invested in a higher risk business than most traditional lenders will consider lending money to.

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Venture Capital. What is it?

Venture Capital is money invested in a higher risk business than most traditional lenders will consider lending money to.

Venture Capitalists, (VC's) can invest in a large number of companies without having to manage them on a daily basis. They also expect to earn a larger return on their investment than they would by investing in stocks or other investments.

VC's usually have a background in a particular industry where they were successful. They are business people and may have MBA's or degrees in Physics, engineering, etc. and tend to invest in the areas they are familiar with. That includes geographic areas near where they live because it is easier to attend meetings, or visit the company they are investing in. However there are companies that invest in certain countries or almost anywhere in the world.

What entrepreneurs should know about Venture Capital.

Venture capitalists have to go out and raise money just like the entrepreneur. They are not angel investors, who use their own money. They usually manage a fund for an institution. They get the money from corporations, pension funds, public pensions funds, wealthy individuals, endowment funds, and insurance companies.

It takes time to raise that money. They have to set certain criteria for the funds so they can get the money. The funders for the VC want to know they can trust the investment. That is why the VC will only invest in certain types of business such as technology, medical or other industry. Some will not invest in start ups or provide seed money. Some will invest in new companies and some will want to see a track record.

What to Expect when Seeking Venture Capital

Expect to be turned down. That does not mean the idea or company is not a good one. It can mean that it does not fit the criteria of the fund.

Expect it to take time. Finding the right VC can take a lot of time. Since they can specialize in certain areas, finding the VC that will invest in your industry can require some effort. It also takes time to get the funding. It can take months to finally get the funding you need. They will ask a lot of questions and expect you to have the answers.

Expect Them to want to take part in management. VCs usually have a lot of experience in an industry. That can be an advantage to you and your company. Don't let your ego get in the way of accepting advice. After all they want you to succeed as much as you do.

Expect a lot of due diligence. They want to be sure that the management knows what it is doing. Experience in the business is important for success. A good business plan will be required.

Most important. Expect them to want you to have a personal investment in the business. A great idea is just that. It has no value unless you have a personal stake in the business. If you are unwilling to put your money on the line, don't expect anyone else to.

VCs get hundreds of proposals They may fund 2 out 10. They are not interested in "Stealling Your Idea". They know what it takes to get a company off the ground. Why waste time stealing and idea and trying to launch something new? They can invest in something that can provide them a good return without the hassle?

A final word. Venture Capital is not last resort funding as many seem to believe. It is more difficult to prove a proposal to a VC than most people seem to think. VCs take on a higher risk than most other types of lending so they have to prove it can at least have a good chance of success.

Remember, if a VC fund has 1 or 2 star performers in its portfolio, it is doing well. 7 out of 10 business funded may do ok but will not have the same return on their investment as 1 or 2 of them might have.

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About the Author: Rick McCoo
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Many businesses would benefit from a suite of specific commercial non-bank finance products, each of which performs a different and essential financing function yet work together harmoniously. Frequently, businesses end up with an unplanned hodge-podge of different financing products for different purposes, but the different products work against each other. This is wasteful of time and opportunity. FBI can do for a small and medium size enterprise (SME) what the conductor does for the orchestra; bring together differing elements and have them work together.

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