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What is Venture Capital?

concernedman19185284.jpgSo you believe that you have developed the next big idea in business. You have done your research, studied the market, gone to trade shows, and even gotten positive feedback, but there is still one big problem. How do you get the money for a start-up company to develop and sell your product?

Your first idea may be to approach a bank and ask for a loan. You will most likely soon find out those banks, are not interested in a start-up company that is little more than an idea. Because getting money for a startup is so difficult, your search for money may very likely, lead you to the venture capital market.

In the simplest definition, venture capital is other people's money, is used for financing for new, usually high-risk start-up businesses. There are a lot of well-known businesses that were financed, when they were start-ups, by venture capital. Venture capital firms working bypooling investment dollars,from investment companies, pension funds, large corporations, university endowment funds, and even wealthy private individuals. They then use these funds to invest in start-up companies that they think will be profitable. These pooled funds are called private equity.

It is important to understand what venture capitalist, want in return. Venture capitalists are only interested in businesses, they think will turn into solid investments. Because they take on so much risk, when they make an investment in a start-up unknown firm and product, they look to earn a very high return. Because of this venture capital firms pick and choose their investments carefully, as they are investing other people's money. They will only take on those projects; they think will earn the high return. In addition, venture capitalists usually become involved in the business, by lending their expertise in the hope of helping the business succeed. Their ultimate goal of venture capitalists is to take the business public someday. Because of this they look, for small businesses with the potential to grow larger.

Venture capital firms, who make an investment in a small business, will want to take an equity or ownership stake, in the company. They usually take preferred stock in the company, and want one or more seats on the Board of Directors. They will also want access to the financial information of the company. Small businesses who accept venture capital investments must be willing to share decision-making power, with the venture capitalists that have a stake in their firm.

Now that you know who venture capitalists are, you may be wondering where you can find them. It is crucial to understand that venture capital firms, get a large number of proposals, from small businesses, and it can be difficult to capture their attention. The best way to get in with a venture capital firm is to get a referral through a financial professional. You can talk with your banker, lawyer, CPA, or other financial professional and one of these experts should be able to make a referral for you. Keep in mind that some venture capital firms will focus on one geographic area, or one or two specific industries. You can also attend private equity conferences or industry events. This is a good place to find out how other professionals in your industry attracted venture capital.

It is important to keep in mind that before you visit the venture capital firm, you must develop a business plan, and a presentation for that business plan. This is the first thing the venture capital firm will ask for, and the only way to get serious attention. You must be professional, prepared, and organized. Finally, understand that the venture capital market is very much a networking and personal introductions market. It may take months to attract financing through venture capital, but you can be successful if you preserve.

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