With almost unlimited opportunities the advancement in technology is creating within the last 2 decades, many startups and small businesses today often seek for capital that can bring their dream business to success. While there is a wide range of financial sources that they may tap on, these types of entrepreneurs are hesitant in borrowing money from banks and financial lenders due to 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 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 made available from venture capital firms to companies with high prospect of growth.
Venture capitalists are those investors who have the ability and interest to finance certain kinds of business. Venture capital firms, on another hand fund administration services, 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 isn’t for several businesses. Similar to the filing of bank loan or requesting a distinct credit, you need showing proofs that the business has high prospect of growth, particularly during the first four years of operation. VCs will request 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 that you’ve that business plan well-written and that the management team is fully ready for that business pitch.
Because VCs would be the more capable entrepreneurs, they want to ensure that they may get better Return on Investment (ROI) as well as a fair share in the business’s equity. The mere undeniable fact that venture capitalism is just a high-risk-high-return investment, intelligent investing has long been the conventional type of trade. An official negotiation involving 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. Next, VC firm would then decide how much venture capital are they going to place in. Both parties should also acknowledge the share of equity each will receive. In most cases, VCs get a portion of equity including 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 is there to assist 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 always 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 think that large profits of a couple of may even out the tiny loses of many.
Any company seeking for capital must make certain that their business is bankable. That’s, before approaching a VC firm, they must be confident enough that their business idea is innovative, disruptive and profitable. Like every other investors, venture capitalists want 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 time, the venture capital market has become the driver of growth for thousands of startups and small businesses round the world.