VENTURE CAPITAL

The word venture suggests that this type of capital involves a degree of risk and even something of a gamble.   Specifically the venture capital industry supplies capital and other resources to entrepreneurs in business with high growth potential in the hope of achieving a high rate of return on invested funds. 

The core business of venture capitalists is investing in other businesses, taking a percentage of the business and paying the business owner for it.   If the business makes a loss, they’ll write the loss off, and if the business succeeds they will take a share of the profit of the business and any increase in the business value when they sell their share.   

The venture capital process begins with the concept of a target investment opportunity or opportunities which leads to a written proposal or prospectus to raise the venture capital funding.    Once the money is raised, venture capital firms seek to add value in several ways- identifying and evaluating business opportunities, tracking and coaching the firm, providing technical and management assistance, attracting additional capital, directors, management and other key stake holders and resources, and ultimately crafting and executing exit strategies.   Typically, the process can take 5-10 years. 

Before they invest venture capitalists make a very thorough investigation of the business and the personnel behind the business.   It will be essential for the business seeking venture capital to prepare a written Business Plan as part of this process. 

The availability and cost of venture capital to an entrepreneur will depend on a number of factors:

·         Perceived risk, in view of the quality of the management team and the opportunity

·         Industry, market attractiveness of the technology, and fit

·         Anticipated growth rate

·         Age and stage of development

·         Amount of capital required

·         Founder’s goal’s for growth, control, liquidity and harvest

·         Fit with investor’s goals and strategies

·         Relative bargaining positions of investors and founders.  

Typically, only 2-4 percent of the ventures contacting venture capital firms receive financing from them.   It is the venture capitalist’s stringent criteria for their investments that limit the number of companies receiving venture capital money.   Venture capital investors look for ventures with very high growth potential where they can get a high return on investment, they place a very high premium on the quality of management in a venture, and they like to see a management team with complimentary business skills headed by someone who has previous entrepreneurial or profit and loss management experience.    Because of the time and cost it takes to check the business out, venture capitalists are reluctant to spend their time on small investments.