With almost unlimited opportunities the advancement in technology is creating within the last 2 full decades, many startups and small businesses today have a tendency to seek for capital that may bring their dream business to success. While there is a wide range 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 a valuable 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 cash that VCs will invest in exchange of ownership in a company which includes a stake in equity and exclusive rights in running the business. Putting it in another way, venture capital is that funding made available from venture capital firms to companies with high possibility of growth.
Venture capitalists are those investors who’ve the ability and interest to finance certain types of business. Venture capital firms fund administration companies, on one other hand, are registered financial institutions with expertise in raising money from wealthy individuals, companies and private investors – the venture capitalists. VC firm, therefore, could be the mediator between venture capitalists and capital seekers.
Because VCs are selective investors, venture capital isn’t for all businesses. Just like the filing of bank loan or requesting a type of credit, you’ll need to show proofs that your business has high possibility of growth, particularly during the first three years of operation. VCs will require your company plan and they will scrutinize your financial projections. To qualify on the first 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 would like to ensure that they can get better Return on Investment (ROI) as well as a great amount in the company’s equity. The mere fact that venture capitalism is really a high-risk-high-return investment, intelligent investing has long been the standard style of trade. A formal negotiation involving the fund seekers and the venture capital firm sets everything in their proper order. It starts with pre-money valuation of the organization seeking for capital. Following this, VC firm would then decide how much venture capital are they going to place in. Both parties should also agree with the share of equity each will probably receive. Generally, VCs get a percentage of equity which range from 10% to 50%.
The funding lifecycle usually 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 exist to assist the company. VCs can harvest the returns on the investments typically after 3 years and eventually earn higher returns when the organization 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 genuinely believe that large profits of a couple of may even out the little loses of many.
Any organization seeking for capital must make sure that their business is bankable. That’s, before approaching a VC firm, they should be confident enough that their business idea is innovative, disruptive and profitable. Like any 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. Aside from 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 has transformed into the driver of growth for 1000s of startups and small businesses across the world.