What is Venture Capital?
Venture Capital is the process by which investors fund early stage, more risk oriented business endeavors. A venture capital funding arrangement will typically entail relinquishing some level of ownership and control of the business. The investment is usually in the form of stock or an instrument, which can be converted into stock at some future date. Venture capitalists typically expect a 20% to 50% annual return on their investment at the time they are bought out. Some will invest as little as $50,000 and as much as $20 million in any one company, but typical investments range from between $500,000 and $5 million. Management experience is a major consideration in evaluating financing prospects.
Types of Venture Capital
Seed/Startup Funding
Earliest stage of business, typically no operating history. Investment is based on a business plan, the management group backgrounds along with the market and financial projections.
First Round Funding
Typically funding that accomodates growth. Company may have finished R&D. Funding is often in the form of convertible bond.
Intermediate/Second Round Funding
Maturing company where a future leveraged buyout, merger or acquisition and/or initial public offering is a viable option.
Later Stage Funding
Mature company where funds are needed to support major expansion or new product development. Company is profitable or breakeven.
Equity Loan
Offer of an ownership position to induce the loan or can be a note that has an option to convert from debt to equity.
Mezzanine Funding
Company's progress makes positioning for an Initial Public Offering viable. Venture funds are used to support the IPO.
Merger and Acquisition
The combination of two companies. If one company survives it is a merger, if both survive it is an acquisition.
Sources of Funding
The private sector is the dominant source of venture capital funding. See the URL below for a list of private firms supplying venture capital.
The government is one of the major sources of small business capital. The government finances small business through the following programs.
Raising venture capital is both a marketing and sales challenge. To insure your success, you must both develop a product that a large enough market wants to buy, and he or she must have the selling skills to convince the dogs that they should eat your particular brand of dog food. Most professional venture capitalists are essentially in the business of screening, qualifying, and selecting venture capital investments from as large a source of quality deal flow as they can muster. A few venture capitalists are essentially entrepreneurs themselves and can work with an entrepreneur to start and develop a new company.
Required Documentation
The following documents are to be prepared and reviewed thoroughly before soliciting venture capitalist for funding. Venture Capitalists will judge you by your preparedness and knowledge of how to work with them.
Don'ts
The following links contain additional information on Venture Capital Financing and are excellent sources of Venture information.
Financing with venture capital: http://northshore.shore.net/~nsbol/venturec.htm
Venture Capital Firms on the Internet: http://www.financingsources.com/
Venture Capital Search Sites: http://bd.dowjones.com/
Register your Venture on the Net: http://www.businessexchange.com/