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.

Keep in mind that there’s no “adventure” in venture capital. Companies that provide this kind of funding are not looking to help a plucky underdog reach their goals (those are angel investors), they’re looking to buy into as sure as thing as possible and make absolutely certain that it works out. 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. In fact it is usually a condition of the investment that the venture capitalist will bring technical and managerial skills as well as money to the table.

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. 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 from business owners 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, but it can feel that way.

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. When a venture capitalist is on the board, owners find themselves defending choices a lot more strenuously than before.

The venture capitalist also has an exit strategy in mind. Business owners may want to go on growing forever without even looking into 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 a detailed agreement on the exit strategy before any money changes hands.

That being said, venture capital 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 the technical and managerial expertise 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 the Right Solution for You?

The answer to that one depends on a number of factors and is probably best answered by a business adviser. That being said, not all businesses are right for venture capital.

Traditionally venture capitalists are looking for small businesses that have innovative products with wide appeal to develop and sell. They see a company’s capacity for rapid growth and ability to generate increasing value. If you’re running a typical small business focused exclusively on your local area, venture capitalists won’t be interested in you.

Nor will venture capitalists be interested in you if your product has only limited appeal. While they may invest in a product with a particular niche, if  there isn’t international appeal, 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 a specific direction. 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

It’s entirely feasible to Google “venture capitalists” and see what pops up, but it’s not exactly the most efficient way to secure funding. Venture capitalists tend to specialize in various industries and types of product, not to mention when in a company’s life they are willing to invest. So finding a venture capitalist who is right for your product and 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. There are stages that you have to work through and documents like Term Sheets that you need to understand and accept. It can be a daunting task, to say the least.

That’s where business advisers such as those at EM Advisory Corp become indispensable. An experienced business adviser will know which venture capitalists specialize in your industry and which ones are interested in investing in a business at your stage. They’ll also be able to walk you through the extensive paperwork.

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