With almost unlimited opportunities the advancement in technology is creating within the last two decades, many startups and small businesses today have a tendency to seek for capital that may bring their dream business to success. While there is a wide selection of financial sources that they may tap on, these types of entrepreneurs are hesitant in borrowing money from banks and financial lenders because of the risks involve. But positive thing is that they've found a great alternative and that is by raising venture capital from the venture capitalists or VCs.
Venture capital is that sum of money that VCs will invest in trade of ownership in a company 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 prospect of growth.
Venture capitalists are those investors who have the ability 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. Just like the filing of bank loan or asking for a line of credit, you need to show proofs that your business has high prospect of growth VC Scout Programs
, particularly during the very first 36 months of operation. VCs will ask for your business plan and they'll scrutinize your financial projections. To qualify on the very first round of funding (or seed round), you have to ensure that you have that business plan well-written and that your management team is fully ready for that business pitch.
Because VCs would be the more capable entrepreneurs, they would like to ensure that they may progress Return on Investment (ROI) in addition to a fair share in the company's equity. The mere fact that venture capitalism is a high-risk-high-return investment, intelligent investing has long been the conventional model of trade. A formal negotiation involving 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. Next, VC firm would then decide how much venture capital are they going to place in. Both parties should also agree on the share of equity each will receive. In most cases, VCs get a portion of equity including 10% to 50%.
The funding lifecycle typically 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 exist to aid 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 always there. But VC firms' strategy is always 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 several will even out the tiny loses of many.
Any organization seeking for capital must ensure that their business is bankable. That is, before approaching a VC firm, they should be confident enough that their business idea is innovative, disruptive and profitable. Like some other investors, venture capitalists want to harvest the fruits of these 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 time, the venture capital market is among the most driver of growth for 1000s of startups and small businesses across the world.