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Venture Capital Financing

Written by: Gopinathan Thachappilly

Article Overview: Venture Capital is a source for raising equity for your business. You must have a good proportion of your funding in the form of equity before lenders would feel comfortable about lending money for your small business. Venture capital funds also does not involve inflexible terms for payment of interest and repayment of the principal. What are the factors that affect your ability to raise venture capital?

Venture Capital Financing

Venture Capital Financing is one way you could raise money for starting your small business. Before we look at venture capital, let us get the total picture.
There are two broad sources of finance, EQUITY and DEBT. Equity means money brought in by the owners while debt is money obtained from lenders. You have to pay interest, as well as the amount borrowed, to these lenders.
Before they lend funds, lenders would look at the capacity of the borrower to pay the interest and repay the loan. One way they do this is by looking at the quantum of equity investment. They know that without adequate equity, a small business could go bankrupt during, say, a prolonged slump in the market. And that would mean losing the moneys they have lent.
So your small business would need to show a reasonable proportion of equity financing.
Equity funds are owner's funds. In actual practice, however, these funds could come from your friends, relatives, employees or even customers. If you have a good rapport with them, they might help you out by providing you startup funds.
Venture capital could also be a source of equity funds. Venture capitalists are wealthy individuals or cash rich companies that seek investment opportunities promising high returns. They look for returns higher than, say, what they could get by lending money for interest.
The one key advantage of venture funds is that you need not pay a fixed interest right from the start. Instead, the venture capitalist would wait a reasonable time till the business has established itself and begun to generate good profits.
Typically, the venture capitalists earn their returns by selling the company's stock in the stock market when the price is high enough. That means you don't have to repay the money you obtained from them. You just pay dividends to your shareholders.
So where's the catch?
The catch is that venture capitalists don't invest in all the business proposals that they get. They scrutinize thousands of proposals every year and invest only in a few of them.
They select these few by looking at the profit and growth potential of the business. For a start, they would want to look at past performance. And that means a completely new entrepreneur could not realistically hope to raise venture funds, because he or she does not have a past record to show.
Venture capitalists typically invest in businesses that have been in existence for three to five years. They would be able to assess the management strength of the business from the performance record during this period. That leaves them free to focus on the key issues of high profit and growth potential of the business.
Venture capital companies usually focus on one or a few closely related industries. They would thus have a good idea of the business prospects in these industries. Additionally, they would be able to assess how your business is likely to perform in this industry, considering your particular strengths.
They look for unique strengths that could be exploited by infusion of additional funds. For example, you might have an innovative product that could quickly achieve a leadership position in the market with an extensive publicity effort. Such a leading product could command premium prices and achieve high volumes.
Or you might have some competitive strength, which the venture capital could help you to exploit more fully.
Whatever it is, the objective of the venture capitalist would be to earn high returns both through high dividends from the business and by selling their stocks at high prices in the stock market.
If you are a complete newcomer, your hope lies in convincing the venture capitalist that you have a practicable business model to earn high returns. You would have to do this through a fully developed business plan that would pass the scrutiny of the investor. This investor would be a person who has specialized in the industry. Hence, the person would be able to assess how realistic the plan is.
If you do really have an exceptionally superb idea, the investor might even help you develop a complete business plan to exploit its commercial potential.

Related Articles
  Free Online Term Sheet Generator
  Equity Financing
  Working Capital Financing
  Venture Capital - Getting Ready
  How To Raise Capital To Help Grow Your Business

Article Tags: business venture, capital venture, lending money, small business, venture capital financing, venture capital funds



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Del Castienne - International Business and Project Brokers - In addition to the above, Del Castienne is an international brokerage firm specializing in various entrepreneural services. Del Castienne is more than just a brokerage, as we facilitate Private International Venture Capital for Business and Projects from Commodity Speculation Transactions, MBO, MBI, M&A, Bridging Finance, Patents, Branding, JV, Corporate Advisory Services, Business Plan Development, etc.. Del Castienne is linked to 1200 private international Venture Capital consortiums and Funding Syndicates with a funding capacity of $ 115 billion and 5000 international Investment Bankers and Business & Project Brokers. This in itself should provide you with a gateway to the best source of funding in the world. Through Del Castienne any entrepreneur can have up to a potential success rate of 25% (conditions apply) with absolutely no up front costs. Del Castienne charges a maximum of 5% commission which is far below the international standard of 10% - 12% on project value. If you are tired of running back and forth with countless dissappointments, please give us an opportunity to assist you. Our minimum Venture Capital amount is $1 million and we a Commitment Letter can be provided with in 30 days after formalities are in place and your information was received.
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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