With almost unlimited opportunities the advancement in technology is creating in the last 2 decades, many startups and small businesses today tend to seek for capital that can bring their dream business to success. While there’s a wide variety of financial sources that they can tap on, most of these entrepreneurs are hesitant in borrowing money from banks and financial lenders because of the risks involve. But good thing is that they’ve found a great alternative and that is by raising venture capital from the venture capitalists or VCs.
Venture capital is that amount of money that VCs will invest in trade of ownership in a company including a stake in equity and exclusive rights in running the business. Putting it in another way, venture capital is that funding offered by venture capital firms to companies with high prospect of growth.
Venture capitalists are those investors who have the capability and interest to finance certain kinds of business. Venture capital firms venture capital start up, on the other hand, are registered financial institutions with expertise in raising money from wealthy individuals, companies and private investors – the venture capitalists. VC firm, therefore, may be the mediator between venture capitalists and capital seekers.
Because VCs are selective investors, venture capital is not for many businesses. Similar to the filing of bank loan or asking for a line of credit, you’ll need to show proofs that your business has high prospect of growth, particularly during the initial 36 months of operation. VCs will require your company plan and they will scrutinize your financial projections. To qualify on the initial round of funding (or seed round), you’ve to ensure you’ve that business plan well-written and that your management team is fully ready for that business pitch.
Because VCs will be the more experienced entrepreneurs, they want to ensure that they can progress Return on Investment (ROI) as well as a great amount in the company’s equity. The mere undeniable fact that venture capitalism is a high-risk-high-return investment, intelligent investing has always been the standard style of trade. A proper negotiation between the fund seekers and the venture capital firm sets everything inside their proper order. It starts with pre-money valuation of the company seeking for capital. After this, VC firm would then decide on how much venture capital are they going to put in. Both parties must also acknowledge the share of equity each will probably receive. Typically, VCs get a percentage of equity ranging from 10% to 50%.
The funding lifecycle typically takes 3 to 7 years and could involve 3 to 4 rounds of funding. From startup and growth, to expansion and public listing, venture capitalists is there to aid the company. VCs can harvest the returns on the investments typically after 3 years and eventually earn higher returns when the company goes public in the 5th year onward.
The odds of failing are usually there. But VC firms’strategy is always to invest on 5 to 10 high-growth potential companies. Economists call this strategy of VCs the “law of averages” where investors genuinely believe that large profits of several may also out the little loses of many.
Any company seeking for capital must make sure that their business is bankable. That is, before approaching a VC firm, they must be confident enough that their business idea is innovative, disruptive and profitable. Like some other investors, venture capitalists wish to harvest the fruits of their investments in due time. They’re expecting 20% to 40% ROI in a year. Apart from the venture capital, VCs also share their management and technical skills in shaping the direction of the business. Over the years, the venture capital market has become the driver of growth for 1000s of startups and small businesses around the world.