Venture Capital Financing

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.



Venture Capital Financing - To learn more about this author, visit Gopinathan Thachappilly's Website.

Like this article? Share it with your friends

E-Mail | Print | More

Related Articles
Equity Financing
	Most small or growth-stage businesses use equity financing in a limited way. As with debt financing, most of the time additional equity comes from non-professional investors such as friends, relatives, employees, c...
Venture Capital - Getting Ready
	If you've ever wished you could sit down alone with an experienced venture capitalist and have them give you an inside track on exactly what they look for when funding projects, and how to give yourself an edge, thi...
How To Valuate Your Business
	The venture capitalists will usually look at your projected, or pro forma, earnings 3 to 5 years from the point of their investment. From there they will deduct a 30% annual return that they expect to receive and wi...
Why should Venture Capitalists invest in SME's in Africa?
	Africa is at the dawn of a new renaissance, if you want a high return on your capital, you should include Africa in your portfolio. I'm not only going to invest in Africa because I'm African, but because this is the...
Venture Capital Financing
	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 busine...

---

Related Forum Posts
	Guerrilla Financing - How to Finance Any Small Business
	Raising $5-$10 Million
	Del Castienne - International Business and Project Brokers
	Getting Financed Resources
	Business opportunity in INDIA
	How to valuate a business
	New Small Business Topic
	Funding