With almost unlimited opportunities the advancement in technology is creating in the last 2 decades, many startups and small businesses today have a tendency to seek for capital that may bring their dream business to success. While there's a wide range of financial sources that they can tap on, many of these entrepreneurs are hesitant in borrowing money from banks and financial lenders because of the risks involve. But a valuable thing is that they've found an excellent alternative and that's by raising venture capital from the venture capitalists or VCs.
Definition
Venture capital is that amount of cash that VCs will invest as a swap of ownership in a business which includes 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 potential for growth.
Venture capitalists are those investors who have the capability and interest to finance certain kinds of business. Venture capital firms, on the other hand, are registered financial institutions with expertise in raising money from wealthy individuals VC Scout, companies and private investors - the venture capitalists. VC firm, therefore, could be the mediator between venture capitalists and capital seekers.
Requirements
Because VCs are selective investors, venture capital is not for several businesses. Similar to the filing of bank loan or asking for a distinct credit, you will need to exhibit proofs that the business has high potential for growth, particularly during the very first 36 months of operation. VCs will look for your organization plan and they will scrutinize your financial projections. To qualify on the very first round of funding (or seed round), you've to ensure you've that business plan well-written and that the management team is fully ready for that business pitch.
Process
Because VCs are the more knowledgeable entrepreneurs, they would like to ensure that they can improve Return on Investment (ROI) as well as a fair share in the company's equity. The mere undeniable fact that venture capitalism is a high-risk-high-return investment, intelligent investing has long been the typical style of trade. A proper negotiation involving the fund seekers and the venture capital firm sets everything within their proper order. It starts with pre-money valuation of the organization seeking for capital. After this, 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 is going to receive. In most cases, VCs get a percentage of equity including 10% to 50%.
Funding Strategies
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 help the company. VCs can harvest the returns on the 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 usually there. But VC firms' strategy is to invest on 5 to 10 high-growth potential companies. Economists call this strategy of VCs the "law of averages" where investors genuinely believe that large profits of a couple of will even out the little loses of many.
Any company seeking for capital must make sure that their business is bankable. That's, before approaching a VC firm, they should be confident enough that their business idea is innovative, disruptive and profitable. Like every other investors, venture capitalists desire to harvest the fruits of the investments in due time. They're expecting 20% to 40% ROI in a year. Aside 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 round the world.