Venture Capital Fund: A Viable Risk?
Venture capital fund is considered one of the financing options of a business. A venture capital firm will give a business its much needed funds and first class resources to become an industry player. Seeking out venture capitalists may play a huge role for a company who needs to needs rapid growth and success. Unfortunately even though they may provide a good opportunity there are also disadvantages in acquiring venture capital fund.
Finding potential investors have side effects before and after they approve your business plan. The competition is very stiff. Investors do not care about an entrepreneur’s hopes and dreams. They care about financial projections and earning more money than they invested in a short period of time. In exchange for the money your need; the investors will bite a chunk out of your business and control.
The grass isn’t entirely greener on the other side.
A private equity firm may give you the cash that you need to boost up your business but nothing is free. After all, this is business and money dictates everything. Venture capitalists already have an effect on your business at the start of your application.
Large and established venture capital firms only approve less than 10% of the business plans they come across. Established businesses with a good track record and posses a huge potential are the only ones who have the chance of getting approved.
Private equity firms also invest in specific industries, technologies and geographical area. There are different types of firms but large ones are interested in high technology businesses. You must find a firm that will suit your business and more importantly a product innovative enough to cause interest.
Raising equity to finance your business is time consuming, demanding and costly. Investors will also probe you and your business. During your presentation they will be very critical of your historical financial data, future projections and management team.
They will also evaluate your business’ investment potential.
Once they have decided to invest in your business, they will present their term sheet. This will contain the investment deal including the terms and conditions of the investor. Negotiations will follow between you and the venture capital firm. The most important aspect in this negotiation is the valuation of the business.
This will determine the amount of equity that you will give in exchange for the fund. Investors will require 30% to 40% of equity from your business. This will enable them to exercise their influence and gain a say in your company’s decisions.
Due to this the ownership of the company will be diluted. You also have to provide time to be able to provide information to the investors who will be monitoring your company. You also have to adhere to legal and regulatory issues.
Investors aim to earn money three to five times more than they invested in five years. They will accomplish this by selling their equity or to public stock markets.
All in all using venture capital as a financial option comes with risks. If you are an entrepreneur who doesn’t mind sacrificing a chunk of your business for rapid success then this option suits you.
Be reminded however that securing a venture capital is an arduous process even after you have attained it. Be ready for some additional players in the table.