With almost unlimited opportunities the advancement in technology is creating over the past 2 full decades, many startups and small businesses today have a tendency to seek for capital that can bring their dream business to success. While there's a wide variety 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 an excellent alternative and that's by raising venture capital from the venture capitalists or VCs.
Definition
Venture capital is that sum of money that VCs will invest in trade of ownership in an organization which include 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've the capacity 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, may be the mediator between venture capitalists and capital seekers.
Requirements
Because VCs are selective investors, venture capital is not for several businesses. Similar to the filing of bank loan or seeking a distinct credit, you will need to show proofs your business has high possibility of growth, particularly during the first three years of operation. VCs will require your organization plan and they will scrutinize your financial projections. To qualify on the 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.
Process
Because VCs would be the more experienced entrepreneurs, they wish to ensure they can get better Return on Investment (ROI) as well as a great amount in the company's equity. The mere proven fact that venture capitalism is a high-risk-high-return investment, intelligent investing has always been the typical type of trade VC Scout. A formal negotiation involving the fund seekers and the venture capital firm sets everything within their proper order. It starts with pre-money valuation of the company seeking for capital. After this, VC firm would then decide on how much venture capital are they going to place in. Both parties should also agree on the share of equity each is going to receive. Generally, VCs get a portion of equity which range from 10% to 50%.
Funding Strategies
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 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 company goes public in the 5th year onward. The odds of failing are always 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 genuinely believe that large profits of a couple of can also out the small loses of many.
Any business seeking for capital must make certain that their business is bankable. That is, before approaching a VC firm, they must be confident enough that their business idea is innovative, disruptive and profitable. Like any investors, venture capitalists desire to harvest the fruits of these 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 the years, the venture capital market has become the driver of growth for tens and thousands of startups and small businesses around the world.
