With almost unlimited opportunities the advancement in technology is creating in the last 2 decades, many startups and small businesses today have a tendency to seek for capital that might bring their dream business to success. While there’s a wide variety of financial sources they can tap on, these types of 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 an excellent alternative and that’s by raising venture capital from the venture capitalists or VCs.
Venture capital is that sum of money that VCs will invest as a swap of ownership in a business 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 prospect of growth.
Venture capitalists are those investors who have the ability and interest to finance certain kinds of business. Venture capital firms private equity fund administration, 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 many businesses. Just like the filing of bank loan or seeking a distinct credit, you’ll need showing proofs that the business has high prospect of growth, particularly during the very first three years of operation. VCs will look for your organization plan and they’ll scrutinize your financial projections. To qualify on the very 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 they can improve Return on Investment (ROI) along with a fair share in their equity. The mere proven fact that venture capitalism is really a high-risk-high-return investment, intelligent investing has always been the typical model of trade. A proper negotiation between the fund seekers and the venture capital firm sets everything inside their proper order. It starts with pre-money valuation of the business seeking for capital. Next, VC firm would then decide on what much venture capital are they going to put in. Both parties must agree on the share of equity each is going to receive. Typically, VCs get a percentage of equity ranging from 10% to 50%.
The funding lifecycle typically 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 business goes public in the 5th year onward.
The odds of failing are usually there. But VC firms’strategy would be 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 can even out the little loses of many.
Any business 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 any other investors, venture capitalists desire to harvest the fruits of these 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. Over the years, the venture capital market is among the most driver of growth for 1000s of startups and small businesses around the world.