Venture Capital Funding to Expand Your Business

Venture capital is private equity capital that is generally provided by an outside source, such as outside investors, to finance a new, growing or struggling business. Venture capital is a good potential source of funding your new, comparatively unproven enterprise if you think you have a promising future. However, venture capital is not easy to acquire, so be realistic in your expectations.

You will need to show solid business grounding and potential, because Venture Capital firms, like all other businesses, expect you to give them returns on their investments, not just with interest, but with a large profit.

Venture Capital Sources

Venture capital includes sources of investment like investment funds, partnerships or even divisions of large corporations whose main focus is investing in promising young companies. A large number of venture capital firms are either affiliated with banks and insurance companies, with other financial institutions or large corporations and some are privately owned by individuals or groups or publicly held. Venture capitalists usually have very strict criteria for investment. As an entrepreneur looking for funding, you must understand the nature of the firm you are approaching and gear your pitch accordingly.

Most venture capitalists prefer to purchase convertible stock and may want as much as 50 percent ownership – or more. They generally take preferred stock in exchange for their investment and expect to receive additional rights geared at safeguarding their investment, including the right to elect directors to the company Board, to receive financial and other company reports and all relevant information. Be prepared – venture capitalists will insist on sitting on the Board and offering management or technical advice; however, they do not generally interfere in regular management, unless the company’s survival – and with it their investment – is at risk. Accepting venture capital means a loss of some independence. You will have to relinquish a part of your autonomy and accept the fact that the venture capitalists will end up taking a large part of your profits.

What Venture Capital Firms Expect

A venture capital firm expects a return that is proportional to their risk. However, investment firms will not show interest in a new firm until it has managed to establish and distinguish itself, in some way or another, enabling them to determine risk factors. Their interest level depends on the new firm’s developmental stage. Once a firm is established and has a functional organizational structure along with a viable business plan and a valid start up plan, some VC firms usually express their interest. Other VC firms prefer a later stage, when the new business is in the second or third stage of growth requiring capital for expansion. Still others wait until a merger or a public offering is imminent.

Your business plan will be the primary analytical tool for VC firms. They will look for innovations in product or service that gives your company a competitive edge. To attract the interest of VC firms, submit your new idea with market surveys showing its appeal to the public and potential market. The quality and experience of the management team is a key factor, so back up your proposal with solid evidence of your skills in this area. Also, show that your product or service is in a growing market with lots of potential. Remember that although the minimum investment is generally from $25,000 to $1,000,000, there is no real limit the amount of financing that the right proposal will attract.

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