With almost unlimited opportunities the advancement in technology is creating over the past 2 decades, many startups and small businesses today tend to seek for capital that might bring their dream business to success. While there is a wide range of financial sources they can tap on, most of these entrepreneurs are hesitant in borrowing money from banks and financial lenders due to the risks involve. But a valuable thing is that they’ve found a great alternative and that’s 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 an organization which includes a stake in equity and exclusive rights in running the business. Putting it in another way, venture capital is that funding offered by venture capital firms to companies with high possibility of growth.
Venture capitalists are those investors who have the capacity and interest to finance certain kinds of business. Venture capital firms fund administration companies, 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, may be the mediator between venture capitalists and capital seekers.
Because VCs are selective investors, venture capital is not for several businesses. Just like the filing of bank loan or asking for a line of credit, you need showing proofs your business has high possibility of growth, particularly during the very first four years of operation. VCs will request your organization plan and they’ll scrutinize your financial projections. To qualify on the very first round of funding (or seed round), you have to make sure that you have that business plan well-written and your management team is fully ready for that business pitch.
Because VCs are the more knowledgeable entrepreneurs, they would like to ensure they can get better Return on Investment (ROI) in addition to a great amount in the business’s equity. The mere undeniable fact that venture capitalism is just a high-risk-high-return investment, intelligent investing is definitely the standard style of trade. A formal negotiation involving the fund seekers and the venture capital firm sets everything in their proper order. It starts with pre-money valuation of the organization seeking for capital. After this, VC firm would then decide on what much venture capital are they going to put in. Both parties should also agree with the share of equity each is going to receive. In most cases, VCs get a portion of equity ranging from 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 exist to aid the company. VCs can harvest the returns on the investments typically after 3 years and eventually earn higher returns when the organization goes public in the 5th year onward.
The odds of failing are always there. But VC firms’strategy is always 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 several can even out the tiny loses of many.
Any company seeking for capital must make sure 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 desire to harvest the fruits of the investments in due time. They’re expecting 20% to 40% ROI in a year. Besides the venture capital, VCs also share their management and technical skills in shaping the direction of the business. Over time, the venture capital market is just about the driver of growth for thousands of startups and small businesses around the world.