With almost unlimited opportunities the advancement in technology is creating over the past two decades, many startups and small businesses today tend to seek for capital that could bring their dream business to success. While there is a wide variety of financial sources they can tap on, these types of entrepreneurs are hesitant in borrowing money from banks and financial lenders due to the risks involve. But good 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 cash that VCs will invest in trade of ownership in a business including a stake in equity and exclusive rights in running the business. Putting it in another way, venture capital is that funding made available from venture capital firms to companies with high prospect of growth.
Venture capitalists are those investors who’ve the capability and interest to finance certain kinds of business. Venture capital firms, on another hand, are registered financial institutions with expertise in raising money from wealthy individuals, companies and private investors – the venture capitalists. VC firm, therefore, is the mediator between venture capitalists and capital seekers.
Because VCs are selective investors, venture capital isn’t for many businesses. Like the filing of bank loan or asking for a distinct credit, you will need showing proofs that the business has high prospect of growth, particularly during the first four years of operation. VCs will require your company plan and they’ll scrutinize your financial projections. To qualify on the first round of funding (or seed round), you’ve to ensure that you’ve that business plan well-written and that the management team is fully ready for that business pitch.
Because VCs will be the more experienced entrepreneurs, they would like to ensure they can progress Return on Investment (ROI) as well as a fair share in the company’s equity VC Scout Programs. The mere fact that venture capitalism is really a high-risk-high-return investment, intelligent investing has always been the conventional type of trade. An official negotiation between the fund seekers and the venture capital firm sets everything inside their proper order. It starts with pre-money valuation of the organization seeking for capital. After this, VC firm would then decide how much venture capital are they going to place in. Both parties must acknowledge the share of equity each will receive. Typically, VCs get a percentage of equity which range from 10% to 50%.
The funding lifecycle often 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 are there to assist the company. VCs can harvest the returns on their 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 usually there. But VC firms’ strategy would be to invest on 5 to 10 high-growth potential companies. Economists call this strategy of VCs the “law of averages” where investors think that large profits of a few can also out the little loses of many.
Any company seeking for capital must ensure 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 any investors, venture capitalists wish to harvest the fruits of their investments in due time. They’re expecting 20% to 40% ROI in a year. Apart from the venture capital, VCs also share their management and technical skills in shaping the direction of the business. Over the years, the venture capital market is among the most driver of growth for thousands of startups and small businesses around the world.