With almost unlimited opportunities the advancement in technology is creating in the last 2 full decades, many startups and small businesses today tend to seek for capital that may bring their dream business to success. While there is a wide selection of financial sources that they may 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 an excellent alternative and that is by raising venture capital from the venture capitalists or VCs.
Venture capital is that sum of money that VCs will invest in trade of ownership in an organization which include a stake in equity and exclusive rights in running the business. Putting it in another way, venture capital is that funding provided by venture capital firms to companies with high possibility of growth.
Venture capitalists are those investors who’ve the capacity and interest to finance certain forms of business. Venture capital firms fund management services, 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, is the mediator between venture capitalists and capital seekers.
Because VCs are selective investors, venture capital is not for all businesses. Like the filing of bank loan or asking for a line of credit, you need showing proofs that your business has high possibility of growth, particularly during the very first 36 months of operation. VCs will ask for your organization plan and they’ll scrutinize your financial projections. To qualify on the very first round of funding (or seed round), you have to ensure that you have that business plan well-written and that your management team is fully ready for that business pitch.
Because VCs would be the more experienced entrepreneurs, they would like to ensure that they may progress Return on Investment (ROI) along with a great amount in the business’s equity. The mere fact that venture capitalism is just a high-risk-high-return investment, intelligent investing is definitely the conventional type of trade. A proper negotiation involving the fund seekers and the venture capital firm sets everything within their proper order. It starts with pre-money valuation of the company seeking for capital. After this, VC firm would then decide how much venture capital are they going to put in. Both parties must agree on the share of equity each will probably receive. Typically, VCs get a share of equity including 10% to 50%.
The funding lifecycle often 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 assist the company. VCs can harvest the returns on their 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 to invest on 5 to 10 high-growth potential companies. Economists call this strategy of VCs the “law of averages” where investors believe that large profits of a couple of can even out the small loses of many.
Any organization seeking for capital must make certain 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 any investors, venture capitalists wish to harvest the fruits of their investments in due time. They’re expecting 20% to 40% ROI in a year. Besides the venture capital, VCs also share their management and technical skills in shaping the direction of the business. Through the years, the venture capital market is among the most driver of growth for 1000s of startups and small businesses across the world.