Venture Capital Cycle – How Does it Go?
Venture capital is something that most aspiring entrepreneurs are eyeing. This is because the deal is rather simple – you submit the proposal, firms accept the deal and provide funds to finance it. Compared to bank loans which you need to repay, venture capital is paid by the firms and investors.
But while it may seem easy, the process may be a little complicated as you go along. Here is a simple discussion on venture capital cycle and how it works.
The cycle is basically made up of three stages: raising of funds, investment of such funds, and exit.
Before you can close a venture capital deal, you must first find a venture capital firm. Research on the firms available, and see which industries they are most inclined to. Your proposal must fit their investment criteria, otherwise, everything would just be a waste of time. The usual fields are biotech and greentech. If these are the types of businesses that you wish to enter into, then you are in luck.
The next step is to develop a business proposal. This you will submit to the firm. It is therefore important that the proposal is short but complete and well-researched. At this stage you may seek help from professionals and consultants. Make sure that there are no errors in it. When it is your time to present, be sure to have studied your proposal and the industry where it belongs in order for you to be able to answer questions that capitalists and managers may ask.
Granting that you’ve submitted a good proposal and was given the 1:400 shot at landing a deal, you have now completed the first stage of the cycle. The next stage is in the investment of such funds.
During presentation, you will be required to present a management team. It is important that this team be composed of competent people who are knowledgeable of the field or industry that you propose to enter. Aside from your own management team, the firm shall appoint managers to help, even impose, policies and decisions in the company. Since these firms have high stakes in the company’s success, it is only logical that they interfere with the decision-making process and in effect, have more control over the company than its owner.
During exit, the funds are liquidated and returned to the investors. This usually happens within 3-5 years, even sooner, if the return of investment is very high. An exit may take different forms, such as merger and acquisition, buyout and initial public offering or IPO. While others may have succeeded in earning more than 500% of their initial investment, there are likewise others who failed. Also, a big chunk of the funds goes to the expenses of the firm, such as management fees, consultation fees, and other fees.
Understanding venture capital cycle will make you better, more efficient entrepreneurs. That is why it is important to do some research, read articles, even enroll in a venture capital course. Furthermore, investigate on the trends of the industry that you want to enter into.
No entrepreneur became successful just by mere luck or chance. Any entrepreneur will tell you that you need to study and understand what you’re doing in order for you to be successful.