What is Venture Capital?
Venture Capital is invested in startup businesses as an alternative to traditional financing. The companies who accept this type of investment typically aren’t under any expectation of paying back the money; however, Venture Capitalists usually have an exit plan, which is their method for extracting a giant profit from their investments. The exit plan is generally an IPO, or an acquisition. It’s important to note that only one in twenty investments will pay-off for a Venture Capital Firm; nevertheless, the deal that reaps a benefit is the one that brings in a windfall for the firm.
Why Venture Capital?
This type of capital is an option for companies who are growing, or expect to grow, extremely fast. Because venture capital is invested by a small group of limited partners, the usual underwriting rules and regulations, which traditional banks use, is sidestepped, making it easier to access greater amounts of capital for before a business has any substantial assets or profits, very quickly.
Advantages
Due to the nature of the investment structure, which is typically a Regulation D private securities offering, business owners are not on the hook, personally, for the payback of the capital; however, that’s not to say that the VC isn’t expecting a return on their investment. Another advantageous part of VC money, is the experience and resources they bring to the table. These firms have deep knowledge with regard to public markets, private equity, and vendor recognition, and they are immensely well connected with law firms, brokerage firms, investment bankers, and the like. When building a large business from the ground up, these latter resources are invaluable, not to mention the reputation the firm brings with it may actually increase the amount of sales to your business; for example, if a well-known firm has capitalized you, the fact that they are financially backing you lends credibility to your brand in that, it may be perceived that your company will be around for years to come, hence it’s worth doing business.
Disadvantages
Since Venture Capitalists are equity holders in a business they’re expecting a massive return on their investment. Depending on the risk they perceive, they may require a larger share of the equity, even a controlling interest. Moreover, since Venture Capitalists are planning an exit from the get-go, it’s possible you’ll end up out of your company within 5-7 years; however, the trade-off is that you’ll become wealthy right alongside the VC’s, provided you negotiate a great deal at the start of the relationship.
Attracting Venture Capital
Knowing how venture capital works, is a vital part of understanding how to obtain an investment. The best way to attract venture capital is by getting involved in VC circles, giving presentations to groups of VC’s, and winning a place among the legions of other entrepreneurs who are seeking their backing. The most important part of attracting the VC community is by nailing-it with an awesome pitch deck, and an accurate, energetic pitch. See our blog ‘How to Pitch a VC’ for details about giving an excellent pitch.