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.
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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.
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David BarrDavid Barr is the President of Venture Opportunities, Inc. David has been a professional business broker/intermediary since 1980 focusing on General Business Brokerage and Mergers and Acquisitions representing client transaction value from $400,000 to $20,000,000. Mr. Barr has handled the sale of over four hundred and fifty companies. David earned a university degree from the State University of New York majoring in economics and business. David holds the Mergers and Acquisition Master Intermediary and the Certified Business Intermediary designations from the International Business Brokers Association. He is also a Senior Business Analyst and a Texas licensed Real Estate Agent. For more information about David and Venture Opportunities, visit www.bizdealmaker.com. - Visit David Barr's Website |
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