Starting your own business sounds very exciting. Ideas abound and are hugely motivating. Challenges appear to elevate the drive to succeed – and it can be a stimulating centre of discussion and planning. However, the biggest drawback to nearly all start-up small business is money – enough to get it going, and enough to carry through the first two years of operation and development.
You don’t want to use your own money if possible, because then you just might end up with a serious loss. And you wouldn’t want to get yourself entangled in bank loans. So, one of the most useful ways to get your business – or your venture – started is to find someone who thinks enough of your idea (and you) to invest their money in the project.
What is Venture Capital?
Essentially venture capital is a valuable source of funding for small businesses looking to start and grow. Venture capital is a type of private financing for small businesses believed to have long-term growth potential. The money generally comes from well-off investors, investment banks, and any other financial institutions with that arm of funding available as part of their stable. Companies funded would need to display exceptional growth potential or be at a point where they are poised to grow and expand quickly.
Why is Venture Capital important?
Innovation and entrepreneurship are the drivers of a capitalist economy. New businesses are often risky and cost-intensive to begin with. As a result, external capital can be sought to spread the risk – and in return for taking this risk, investors are offered equity in the company’s growth, along with voting rights. Venture capital, therefore, allows start-ups to get off the ground, and supporters to hopefully enjoy good returns. Without venture capital many businesses would never get going, and this would be a loss to the economy.
The Venture Capital process
- The first step: Submit a business plan, either to a venture capital firm or to an angel investor. If interested in the proposal, the firm or the investor must then perform due diligence, which includes a thorough investigation of your company’s business model, products, management, and operating history, among other things.
- Utilise the expertise: Many venture capital professionals have had prior investment experience, backed by impressive business qualifications such as an MBA degree, and invariably have run their own businesses successfully. Venture capitalists tend to specialise in certain sectors, such as healthcare, technology, retail, etc.
- Investment comes only after due diligence is done by the investor: If you are looking sharp, then an investor will pledge an investment of capital in exchange for equity in the company. These funds may be provided all at once, but more typically the capital is provided in rounds. The firm or investor then may take an oversight or active role in the funded company, advising and monitoring its progress before releasing additional funds.
Venture Capital versus Angel Investors
For small businesses, venture capital is generally provided by high net-worth individuals looking for good investment options for their money, or venture capital firms. Angel investors on the other hand, are often a widely diverse group of people who have amassed wealth through a variety of sources. They tend to be entrepreneurs themselves, and wish to contribute to others wanting to succeed as they have.
The majority look to invest in well-managed companies, that have a fully-developed business plan and are poised for substantial growth. These investors are also likely to offer to fund ventures that are involved in the same or similar industries or business sectors with which they are familiar. A common occurrence among angel investors is co-investing, in which one angel investor funds a venture alongside another trusted investor/business partner.
Ways in which venture capital adds to the development of a business
Funding: This is the most vital element of the process. Venture capital firms provide funding to start-ups in exchange for an equity stake in the company. This funding can be used to cover start-up costs, product development, marketing, and other expenses associated with launching a new business.
Expertise: In addition to funding, venture capital firms can also provide expertise and guidance to start-ups, covering advice with regard to the development of a business strategy and sound financial planning. The knowledge and experience of the venture capital firm’s team can be invaluable to a small business just starting out.
Networking: Venture capital firms often have extensive networks of contacts in the business world. This aspect can be crucial to developing your business. These contacts can include potential customers, partners, suppliers, and investors. By leveraging these networks, new businesses can accelerate their growth and increase their chances of success.
Credibility: Being backed by a reputable venture capital firm can lend credibility to a small business, helping to attract customers, partners, and employees, and making it easier to raise additional funding in the future.
Exit strategy: Suffice to say that venture capital firms invest with the expectation of a fair return on their investment. They will not be staying with you forever. This means that they will be looking for an exit strategy, such as an acquisition or an initial public offering (IPO). Having a clear exit strategy on the part of the investor can help a small business to stay focused on its goals, while attracting additional funding from other investors.