Venture Capital

venture-capital

01 Nov Venture Capital

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Venture Capital

venture-capitalIf your business is one that has potential to grow beyond your home town and hit the world market then the chances are that you’ve been out scouting around for some finance to help you reach out to those new horizons. If you have then it won’t be long before someone suggests that you need some venture capital. That’s an interesting term and it may not mean quite what you’re thinking.

There’s no adventure about venture capital … at least from the investor’s point of view … so let’s take a closer look at it now before you head out there in search of it.

What is venture capital?
Venture capital is money provided to a business that’s usually in its early stages and has a very real possibility of generating a high return through the sale of shares at an IPO or possibly through the sale of the business at some reasonable time in the future.

Venture capital is usually provided in exchange for shares in the business and often some say in the running of the business. It’s not unusual for a business that has received venture capital to have a representative of the investment firm sitting on the board and offering advice to the business. In fact it is usually a condition of the investment that the venture capitalist will bring technical and managerial skills as well as the money.

Venture capitalists may invest their own money in a business but more often than not the money they invest comes from investment funds and other individuals who are looking for a high return on their money and, while the investments are carefully managed, a venture capitalist usually invests in businesses that are considered too risky for a bank.

Pros and cons of venture capital
One of the most common complaints by the owners of businesses that have sought venture capital is that they lose complete control of their business. That’s not to say that a venture capitalist comes in and takes over because they usually don’t.

However, when venture capital is invested in a business the owner now has someone looking over his shoulder and decisions can’t always be made on the fly as they may have been before the venture capitalist arrived. When a venture capitalist is on the board decisions that affect the business are now based on more than the gut feeling of the owner.

The venture capitalist also has an exit strategy in mind. The business owner may want to go on growing his business forever and may not want to go to an IPO or a sale to a larger competitor but that may be precisely where the venture capitalist wants to go. So there is always going to be some friction unless there’s total agreement on what the exit strategy should be and where it will come in the life of the business.

On the other hand though the venture capitalist brings several things to the table that the business owner may desperately need to survive and grow. First and foremost the venture capitalist brings money and no business can expand without it.

Secondly there’s that technical and managerial expertise that I mentioned earlier. Few business owners have the skills or the training to develop a business to its full potential and that’s where the help of the venture capitalist is invaluable.

Is venture capital right for your business?
The answer to that one depends on a number of factors and is probably best answered by a business advisor. However, if we look at it another way we’ll see that not all businesses are right for venture capital.

Traditionally venture capitalists are looking for small businesses that have innovative products that have, or will have a wide appeal, to develop and sell. Venture capitalists see that businesses like that have a capacity to expand quickly and generate increasing value in the business. So if you’re running a typical small business that will always have its focus in your town or city then venture capitalists won’t be interested in you.

Nor will venture capitalists be interested in you these days if your product has only limited appeal. While your product may have appeal to a narrow niche if interest in that niche does not extend beyond the borders of your own country then you’re probably not going to get to first base with a venture capitalist.

Venture capitalists are also going to be looking for a business with a management team that they can work with. They don’t want to spend their time fighting with the owner or managers in an effort to get the business moving in the direction they want. It’s their money and they want to be able to call … or at least help target … the shots

How to obtain venture capital funding
I suppose you could look up venture capitalists in your local yellow pages but that might prove to be a rather lengthy exercise and it may turn out to be a total waste of time too. Venture capitalists tend to specialize in various industries and they also specialize in just when they’ll put money into a business. So finding a venture capitalist who is right for your product and right for where your business is at can be difficult.

Even if you do succeed in finding someone who is right for your business you’re then going to be facing the problem of how to approach them for some capital. There are stages that you have to work through and documents like Term Sheets that you need to understand and accept and that can all be a very daunting task for a business owner.

That’s where business advisors such as EM Advisory Corp become indispensable. An experienced business advisor will know which venture capitalists specialize in your industry and they’ll know which ones are interested in investing in a business that’s reached the stage that yours is at. They’ll also be able to walk you through all the reports and documentation that needs to be drawn up.

So if venture capital is right for your business then talk to your business advisor and begin looking for the capital that will help you take your business to a whole new level.

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