As a startup company, you are often faced with various challenges from planning the most effective marketing technique to finding the right investors who will capitalize on your business. Luckily, there is one type of financing mainly dedicated to startup companies or small businesses that are high risk but have a big potential for dynamic growth and aggressive expansion. Known as Venture Capital Financing, it is the most suitable type of funding for businesses who need to scale big, in a short period of time.
What is Venture Capital?
When a business is getting started, it needs money. There are a few different ways to accomplish this but many people have heard of startup funding from investors, and tend to think that is a great place to begin. Startup funding is sometimes referred to as venture capital, or vc funding. Although referred to as a startup, this is not actually the case contrary to popular belief. Where venture capital investment assumes a significant job is in the following phase of the advancement life cycle—the period in an organization's life when it starts to market its development. Over 80% of the cash put by financial investors goes into building the framework required to develop the business—in cost ventures (assembling, promoting, and deals) and the monetary record (giving fixed resources and working capital).
Venture Funds are not long-term cash. The thought is to put resources into an organization's monetary record and foundation until it arrives at an adequate size and believability, with the goal that it very well may be offered to an enterprise or so the institutional open value markets can step in and give liquidity. Basically, the venture capital companies that invest in a business, are looking to do so for a short time.
This specialty funding exists due to the structure and rules of capital markets. Somebody with a thought or another innovation frequently has no other foundation to go to. Financial laws limit the premium banks can charge on credits—and the dangers characteristic in new companies typically legitimize higher rates than permitted by law causing businesses to seek other first round capital. Due to the lack of availability from banks and other creditors, most businesses seek venture capital to get their business going once they have reached the stage where it’s time to start moving forward.
Types of Venture Capital
There are five different stages that make up venture capital. Let’s break them down so you can determine the stages when you are ready to make the leap.
- Seed capital – Thinking of a seed and how you plant it and it grows, this stage means that money will be invested for the business to grow more down the road. This might happen before a product or service is developed, but the business is ready to get started. Usually, amounts invested are small and help the business get started.
- Startup capital – This stage applies after the business plan is in place and you are ready to look into marketing to get your brand out there and recognized.
- Early stage – Sometimes also called the first stage (which is inaccurate since it comes as the third stage), these funds would go towards actually producing a product, sales, marketing, and obtaining clients to purchase what you are selling. The amount invested at this stage will be rather high.
- Expansion - This is probably the stage where most growth will happen. If you are successful but want to expand, this is the stage that would be applicable to you.
- Mezzanine – If you are now super successful and want to maybe acquire another business, merge with another, or take steps to become a public offering, this is the stage that applies. This would also be the time that investors may bow out and sell their shares back to you.
Advantages of Venture Capital
Financing and the growth of your company are two major elements to savor success. Most venture capitalists have established financiers with a large sum of money available for disposal. This means that even if you require a huge amount of funds, they are more than able to provide the needed equity for your business. Moreover, there’s no obligation to pay back the money generated from venture firms.
Aside from successful rounds of financing, venture capitalists have the right connections within the industry, which is an invaluable asset for your business. You can use these connections to strengthen your company and introduce your trade within the community. Regardless if it’s a legal issue, tax matter, employee sourcing, or professional experts, investors can use their connections to establish a reliable support system.
- As a startup, you can take advantage of the proficiency of venture firms.
- You can ask guidance regarding business decisions and critical issues that matter.
- They provide a wealth of both financial and expertise to your startup business.
Disadvantages of Venture Capital
While it is true that venture capital financing and the growth of startup firms goes hand in hand to reach an accomplishment, with every advantage comes disadvantages. Beyond its lucrative fund offering, paramount opportunities, and flexible funding options, Venture Capital isn’t suitable for long term businesses. Although you don’t need to pay investors up front, they will need their return of investment in the form of an acquisition or Initial Public Offering (IPO).
This means that as the owner of the company, you need to give them part ownership of the business. Depending on the agreement, this can go up to 50% or even more, making you a minority proprietor. The amount of funding affects the certainty of your business, and being a part owner means losing control of the company. Additionally, Venture Capital is a lengthy and complicated process that could take time.
Autonomy and freedom are lost once investors take their share on the company. You must stand your ground and change the direction of your trade to keep ownership. Carefully plan growth or alternatively look for an exit route to prevent acquisition.
How to Pitch Venture Capitalists?
Requesting cash for your business is consistently tedious, stressful, and unavoidably unpleasant. In any case, there are approaches to make the procedure more profitable and perhaps somewhat agreeable - starting with how, and to whom, you give your pitch. There are a few variables that go into deciding if an investor will put resources into a startup (some instinctual, some quantitative). Being able to convince the investors that your business is the one they should invest in, is time-consuming but doable.
Anyone can put together a PowerPoint or pie chart to illustrate their point, but you need to be able to convince them that your business is going to be worth the risk. Try your best to read the room…if they seem bored or uninterested, move on. Make sure that you can explain your concept well, show how the market needs your product or service, and of course profitability. Even if your business model is sound, it will almost always come down to numbers.
When you have distinguished your objective firms, invest some energy examining the foundations of the organizations' individual financial specialists to locate your best match. Consider the extraordinary people you intend to meet with and tailor your pitch accordingly. As you assemble this data, you may discover an assortment of foundation information that can improve your pitch. Pay attention to the firms you are approaching and the other businesses they have invested in, and tailor your pitch to jive with them.
Be sure to establish a connection with them by telling your story, because that is what people related to. Telling your story is almost as important as backing up the numbers. A back story is going to give the investors information on why you want your business to succeed. And, of course, be sure to practice before you get in front of them. Family and friends are great for this sort of thing.
Is Venture Capital right for you?
When it comes to Venture Capital financing, there’s no right or wrong answer, because the decision solely lies on your goal as the owner. You need to weigh its pros and cons while considering the needs of your business. Choosing Venture Capital means surrendering the totality of your company, listening to other opinions aside from yours, and losing your identity being the boss or chief executive of the firm.
But if you think that growth in startup financial funding is beneficial, and Venture Capital is your only option left, it could make your business bigger and better. From the input of experts, connections of investors, unmatched years of experience, and beneficial resources, the probability of making it big within the industry is highly feasible.
- If you want total ownership of your business, then Venture Capital is not for you.
- If you think that you don’t need guidance or assistance, look for other funding options.
- Weigh the risk-return ratio versus the requirements of your business.
Other financing options
If venture capital financing and the growth of startup firms isn’t your thing, there are other financing options available. Crowdfunding is a popular option for younger entrepreneurs due to its relaxed regulations and availability of resources. It is a collective effort of gathering funds from friends, families, investors, or anybody that is interested in your project.
You could also look for private investors in the form of individuals or companies that will help back up your business. Then you have small business loans and grants offered by private companies, as well as government agencies that help entrepreneurs kick off their projects. Though, bear in mind that grants and loans do have requirements that you may or may not be qualified for.
- Study the startup financial valuation of your business to assess funding needs.
- Loans are perfect for companies with little to no business history.
- Grants are usually given to veterans, immigrants, minorities, and non-profit organizations.