Venture capital: As an entrepreneur, you’ve undoubtedly heard about it, but you might not be acquainted with exactly how it really works or whether it might be a good option for your business. You may be wondering if your startup is even entitled to investment capital. Keep reading to learn what venture capital is, what sorts of businesses and entrepreneurs are great candidates for VC funding, and how to go about tapping into this resource!
What Is Investment capital?
Venture capital is a type of equity financing where investors provide capital to some young business rich in growth potential in return for equity in the business. Along with ponying up startup funds, VC investors also give direction towards the companies they purchase to assist them to succeed. The venture capitalist’s long-term goal is to earn profits when the company they purchase goes public or is sold to a different company.
Venture capital firms are usually looking to invest in tech companies, though some may focus on healthcare or any other industries. Most VC firms specialize in a specific kind of industry, focusing on companies that have been in a specific stage of growth. VC firms are often located in or near tech metropolises, such as New York City, San Francisco, Boston, and Austin, in most cases (but not always) focus on businesses in their immediate region.
How Investment capital Works
Most all of us have seen Shark Tank, but in actuality, there’s a little more to VC than creating a quick pitch to some room of hyper-critical rich people. Securing VC funding is a touch less intimidating than defending your life’s try to Mark Cuban within 5 minutes, but it’s also a long, multistage process. It requires a lot of patience, diligence, and flexibility, as you may need to improve your company to suit your investor’s vision for growth. You should also remember that VC funding is incredibly competitive, as well as your company should have a great deal to offer potential investors — no more than 0.05% of startups can obtain this coveted form of capital.
Venture capital is not a loan; venture capitalists purchase companies in exchange for equity or ownership within the company, betting that they will make money if your company does well. So what are these entities that supply venture capital? Generally, they're investment firms (instead of individual investors). Venture capital investment firms raise and pool funds from the selection of sources, from corporations to nonprofits, pension funds, and wealthy individuals. These investors are limited partners in the investment capital firm.
VC financing is risky for that investor, which often loses money when a company fails. However, they already know not every company they invest in will probably be the next Uber or PayPal. The VC investor can offset their risk by investing in a variety of businesses, most of which may deliver a phenomenal profit. Most VC firms earn profits of about 20% a year.
How Venture Capital Compares
Venture capital shares similarities to particular other kinds of startup financing, but there are also some important differences you must know about.
Venture Capital VS Debt Financing
As mentioned, venture capital is a form of equity financing. Equity financing is different from debt financing in a number of ways. Namely, debt financing is structured as a loan, which you have to repay with interest. However, the debtor is just a debtor; they don’t own any kind of the company and have any say in your business decisions. A few examples of debt financing include lines of credit, business credit cards, and SBA loans.
Venture capital isn't a loan, so the recipient does not have to pay it back or pay any interest or fees. VC also includes not only capital — there is also business guidance and mentorship. But in exchange for that help having your business off the ground, you need to forfeit some control over your organization towards the venture capital firm. Also, unlike debt financing, which serves a multitude of business types, only certain kinds of businesses — technology and innovation businesses rich in growth potential — are good candidates for investment capital.
Read Pros & Cons Of Debt VS Equity Financing to learn more about the differences between debt financing and equity financing (such as investment capital).
Venture Capital VS Private Equity
Venture capital and private equity are both kinds of equity financing and therefore are similar in several respects. PE investment firms and VC investment firms both provide capital to privately-owned companies, using pooled funds from investors which are limited partners from the firm. The main difference is that VCs purchase startup companies in exchange for a minority stake in the company (less than 50%). In contrast, PEs purchase mature companies for any majority stake (more than 50%).
Also, while VC-backed companies tend to be innovative and tech-focused, PEs have a tendency to invest in traditional industries, for example retail, restaurants, and manufacturing. The kinds of mature companies PEs invest in need capital to grow, address inefficiencies, or fix stagnation associated with insufficient capital.
Venture Capital VS Angel Investors
Angel investors also have a many things that is similar to vc's. Private investors invest in privately-held companies in exchange for equity, but these investors tend to be high net-worth individuals or groups of individuals (instead of investment firms). Most angel investors are entirely profit-motivated, but some private investors are at least partially motivated by philanthropy. For example, you will find angle investment groups focused on helping fund underserved business owner demographics, for example women-owned businesses or veteran-owned businesses.
Angel investors typically offer smaller investments and also have a more hands-off approach to supporting your organization. They also tend to serve a wider number of industries than VC companies and provide more flexible terms.
When Investment capital Is The Right Choice For Your Business
The following are features of business owners who're well-suited for venture capital investment:
- Your clients are related to technology or innovation (some examples include web-based tech, sustainable energy, fintech, healthcare technologies, scientific research, software development, electronics, and telecommunications)
- You are fine with eventually selling your company, and you have an exit plan should you choose sell
- You can easily see your company going public at some point, and you've got considered the advantages and disadvantages of doing so
- You are okay with divesting some control over and stake inside your company to an investor (control freaks and VCs aren’t a great mix)
- You really are a serial entrepreneur (or aspire to be one); that's, you develop companies with a plan to sell them or bring them public after which start another one
- You have a large amount of business connections, and, ideally, a few of these connections have been in VC
- Your clients are located in or near a venture capital hotspot (like the San francisco bay area, Silicon Valley, LA, NYC, etc.)
If Venture Capital May be the Right Fit: Next Steps
Do you fit the above mentioned criteria? Here’s exactly what the procedure for obtaining investment capital might seem like for you.
First Steps
The beginning of your venture capital journey is all about finding an ideal fit. It’s a lot diverse from obtaining a financial loan, in which you simply apply to various lenders that offer financing for a variety of business types. With investment capital, you need to find an investor that caters to your particular kind of business in your particular stage of growth — for instance, semi-established fintech companies or healthcare technology companies that haven’t gone to market yet. Location matters, too — whether your company is based in the San francisco bay area, Silicon Valley, or elsewhere, you will need to find and nurture VC contacts in your local market.
Once you have found a suitable VC firm to approach — and, ideally, you should curently have rapport with this particular firm rather than contacting them out of the blue — you can pitch your idea/company and see if they will consider funding you. If it’s a good fit, and they choose to move forward and invest in you, the investor will perform a valuation of your company, both before and after the cash infusion. The valuation will determine the percentage of stock the VCs will own in the company and may also determine the amount of influence the investors have in steering the company before your IPO or sale.
Stages Of Funding
After a deal continues to be agreed on, funding begins. This usually occur in several rounds, the first which is called seed funding. Seed capital is supposed to get a very start up business off the ground (the typical seed round is $2.Two million) and may be used to do things, such as create a prototype, assemble an administration team, or create a business plan. Successive rounds of funding, called series, may become available because the business expands. Series A funding and Series B funding, for instance, focus on somewhat-established businesses that already are offering a product and have a subscriber base, whereas Series C funding helps mature companies expand or perhaps acquire other companies. Different venture capital firms usually focus on different specific phases.
From sending your pitch deck to attending meetings with investors to performing due diligence, it can take from six to nine months or longer to get your first round of seed funding.
Learn About Other kinds of Financing For Startups & Entrepreneurs
If VC isn’t the best fit, that’s okay. There are many other kinds of financing that could be better suited for your small business. Some options include small business loans, small business grants, crowdfunded loans, unsecured loans, and lines of credit. Start your research by looking into these resources with relevant information about many forms of startup financing.
- 8 Alternative Funding Sources If Venture Capital Isn’t The Right Fit For Your Startup Or Small Business
- 6 Financing Options For Up & Coming Entrepreneurs (Plus 4 Expert Funding Tips To Keep)
- 20 How to Finance A company Start-Up
- What Is Venture Debt & Is It The Right Type Of Financing In my Startup Business?
- What Is Debt Crowdfunding & Just when was It The Right Choice In my Small Business?
- Small Business Startup Loans: Your 8 Best Options
- Do I Be eligible for a A Startup Grant?
