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Is Venture Capital Good for Your Business?
The product or service
The industry's growth
As the entrepreneur, you should understand the
nature of a vendor firm, before pursuing this as a financing source. This
type of investor expects a projected return on investment that is directly
related to risk. The greater the risk, the greater the return expected.
Typically, however, an investment firm will not be interested in getting
involved with a new firm until the business has established itself in some
way, so the risk factor can be determined.
Venture capital is a possible source of funding for new, relatively unproven
enterprises that appear to have promising futures. However, such money
is often hard to come by. Be realistic in your quest for venture capital.
Venture capital firms expect a business to be able to return their investment
not only with interest, but with a large profit. Many venture capital
firms are affiliated with banks, insurance companies, other financial
institutions and large corporations. Some are owned by individuals or
private groups of investors and a few are publicly held. Once you accept
venture capital, you have relinquished some of your autonomy and accepted
the understanding that the venture capital firm will take a large share
of the profits you earn.
The venture capital firm and its interest
usually depends upon the stage of the new firm's development. Once the
new firm has established itself and has a working organizational structure,
a viable business plan and start-up arrangement-a venture capital firm
may be interested. However, some firms prefer a later stage of new business
development, perhaps when the new company is in its second or third round
growth state and needs more capital either to carry out expansion plans
or to tide it over until a merger or public offering carries it to the
next stage of corporate growth.
A company's business plan serves as the primary
analytical tool for the venture capitalist. In analyzing the plan, a venture
capital firm would most likely focus on three features.
product or service
Investors seek product or service innovations that give the company
a strong competitive advantage. A new idea, backed by market surveys (measuring
the appeal of the product or service and its potential market) may be
tempting to such investors.
No matter how good the product or how innovative the service, the quality
and experience of the management is a key factor in the success of the business.
The astute investor is well aware of this and looks for solid evidence of
Most venture capitalists purchase common or
convertible stock rather than burden the fledgling enterprise with interest
payments on debt or debentures. They may possibly want more than 50 percent
ownership. Additionally, while the venture capitalists may insist on sitting
on the Board of Directors or offering management and technical advice, they
are rarely interested in the day-to-day management of the enterprise, unless
its survival and their investment is at stake.
Investors also want to be sure that the product or service is in a growth
field. A significant or revolutionary product improvement, by itself,
may not have appeal in a declining product or service category.
Keep in mind that the minimum investment
is generally from $50,000-$500,000, but investment ceilings are almost
Recommended further reading:
Guide To Writing A Business Plan
Venture Vs. Debt Financing
Learn About Capital Sources
Frequently Asked Questions
Venture Anti Frauds
submission for Venture Capital
Plan information and resources