If it is your hope to get funding for your new business by getting financial assistance from a venture capitalist, it is important you first understand some of the specifics of the profession. Though many people commonly associate venture capital funding with the high technology startup companies that come out of Silicon Valley, there are actually venture capitalists throughout the United States who place their funds in many different businesses.
1. Question: What are venture capitalists?
A venture capitalist is a person or firm that provides new businesses with management assistance and investment capital to get things running smoothly. As compensation, the individual or company providing the funds gets a stake in the new business and its earnings. The size of this equity position is typically determined as being proportional to the amount invested and the risk involved with it.
2. Question: In what ways do venture capitalists get involved with a company?
Essentially, venture capitalists use their investment to buy stakes and positions within new companies. This means that while the company accepting the investment is not required to repay the investment capital, the venture capitalist expects capital gains in return. The new business gets a large amount of money to grow operations and development while the entity making the investment is granted an active management role to guide the company toward success.
3. Question: What kind of position does the venture capitalist take?
Once the investment has been made, the venture capitalist should be viewed as a partner. In terms of the aforementioned management position, this may come in the form of a seat on the company’s board of directors or via contributions to management decisions. It is the goal of the venture capitalist to see a return of 30 to 40 percent on the initial investment every year in which the entity is directly involved, which is usually a period of four to seven years. For the company, this means that an aggressive plan for growth must be implemented to meet this expectation.
4. In what ways does a venture capitalist benefit the business?
From a purely financial standpoint, a venture capitalist brings much needed funds into the company without any regular repayment required. The individual should not be considered some kind of lender, as he or she shares your hope for the company’s success. This means the company gets access to his or her network, experience and sense of discipline. This is not to mention the fact that the presence of a venture capitalist in your company gives it added credibility in the larger industry.
5. What do venture capitalists find attractive?
Contrary to what many might think, venture capitalists often place just as much weight on the strength of a company’s team of managers as they do on the product or service they sell when determining where to invest their funds. A product that’s hugely popular one year may be obsolete the next, but with a solid management team, these issues can be overcome. These managers should have cool heads and be receptive and encouraging to change and growth. Every venture capitalist is looking for a substantial return on his or her investment. If the company is in its infancy, the return rate needs to be higher to compensate for the risk. The business needs to be in a position for fast growth in products and management.
However, the financial requirements and projections presented by the company should still be realistic, as the venture capitalist is going to have a conservative view regarding the chances for the business to profit and succeed. Keeping requirements realistic is particularly important early in the business’s cycle. The venture capitalist uses these presentations to gauge the management’s sense of discipline and its capacity to strategize.
If you want to bring a venture capitalist into your company’s fold, competence and confidence are the two most crucial qualities to demonstrate.
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