There are many different ways that you can fund a business. If you do not have your own money to fund the entire business, or even any of the business, venture capital may be a great option for you to consider.
Venture capital is a type of financing that can be obtained through investors. Investors commonly give funds to startup companies and small businesses. They do not do this for just any startup or company; they provide financing to those that they think will have long-term growth potential and companies from which they believe they can get a good return on their investment. For some markets, it is imperative to get additional financing from outside sources unless there is a lot of money to work with, which is what makes venture capital a great option. For investors, the risk can be very high, but in return for the investment the investor may also get a stake in the company. That means that they get a say in company decisions. While the risk may be large, the potential for above-average returns is what is very enticing.
Venture capital can come from the following sources:
With loans and other types of debts becoming harder to obtain, venture capital is a very viable option. It does not always have to be in the form of money; it could also be a form of expertise for the business, such as technical or managerial, to help it prosper. Additionally, it could be the added connections that the investor brings to the table. This alone could be a great benefit for a company that is very new to the market and does not have experience or contacts.
Another term that is consistently used with venture capital is "angel investors." But what exactly are angel investors? The venture capital that is provided to many startups and small businesses come from high net worth individuals, or HNWIs. They are also known as angel investors. The money can also come from venture capital firms, but these are not exactly angel investors unless it is an angel investor firm.
An example of a venture capital firm is the National Venture Capital Association (NVCA). It is made up of several venture capital firms. This is different than an angel investor because an angel investor group is usually a group of diverse individuals with wealth that has been accumulated through a variety of means. The majority of angel investors are actually entrepreneurs as well, but this is not a qualification for the classification. It is also usually a group of individuals that have retired early from their various ventures that have become very successful businesses and even empires. These individuals are usually looking for a way to continue growing their money through investing instead of being the ones that are on the ground running the business. Many of them are looking to invest in a company that is well managed and has a solid business plan that is fully developed.
Investors also like ventures that have the potential for a fair amount of growth so that their investment can get a quality return. If they do not see this in the venture, there is a slim chance that they will invest any of their own money into it.
Additionally, it is also common for many of these angel investors to choose to invest in ventures that are within the same industry or specialty that they are already familiar with and have likely done business in before. This is because they have a good understanding of these industries and specialties so they know what has a good chance of succeeding and what has a good chance of failing. They feel more comfortable investing in things that they already have a good understanding of. This is not a requirement, and there may be some angel investors who do not follow this pattern. Another thing that is not uncommon is co-investing, where two or more angel investors get together to provide the venture capital. They may also do this with a friend or associate that they trust or that they have worked with in the past. This is also where angel investor groups come into play, as mentioned before. There may be some angel investors that prefer to be part of a larger firm for the purpose of investing.
If you are interested in finding some venture capital for your startup or small company, it is important to know the process so you can be successful. The very first step that you should take is to create a business plan. A business plan is a key component because without it, your startup or small business will likely not even be considered. In the business plan, you should detail the following information:
This should be a very thorough plan that can be used to convince a venture capitalist to invest in your company, but it also serves as the blueprint for your business and your path to success.
Once you have your business plan ready, you will need to submit it to the appropriate party or parties. This means you will need to submit it to an angel investor or a venture capital firm. This is the way you will get the attention that you need to possibly get the money you are searching for. Once it has been submitted, the appropriate party will review your business plan. If they are interested in your proposal, then the firm or the investor will take the time to perform their due diligence. This means they will investigate your business model, your products or services, your operating and business history (if applicable), and any other things that they wish to examine before they decide if they want to proceed.
Once this step has been completed by the venture capital firm or the angel investor(s), and if they are interested in moving forward, they will likely make a pledge for investment. In return for the investment, it is common for them to ask for some equity in the company. Equity in the company refers to ownership in the company. If you accept the pledge, then you will get the money in return for the amount of equity proposed. The amount of equity is typically a percentage of the company and not a flat dollar amount. At this point, the firm or investor will take an active role in the company that they have funded. They may also choose to be a silent shareholder, but this is not as common. Additionally, the capital that you have requested may or may not be provided all at once. It is more common for the money to be provided to you in rounds. This is how the investor or firm ensures that certain milestones are being met and that you are holding up your end of the agreement. Once certain milestones or achievements have been met, then another round of capital will be provided. As part of the agreement, there may also be an outline of the time period that the investor will be part of the company. They may choose to only invest for four to six years or there may be an indefinite amount of time. Either way, it is common for investors to exit the company after a specific amount of time. This may happen after they get a good amount on their return, if the company is sold, if it is acquired by another company, or if it goes public.
There are many benefits of using venture capital financing to fund your business. These are just a few that you can enjoy through the process:
Even with a lot of advantages that you can enjoy, there are also some disadvantages to consider before you dive into this method. These are the main ones to consider:
When you are trying to determine if it is the right option for you, you need to be very thorough in your examination. You should consider whether or not you would be open to the active input of an investor. If you do not think you will be open to any feedback or suggestions, then this is not the right method for you. You should also consider whether or not you would be ok with losing some of the ownership of your company. If you want to own 100% of the company, then you will not be able to come to an agreement with an investor. On the other hand, if you think that you need those resources and could benefit from the expertise that comes with an investor, then it would be a good option to consider. When it comes to venture capital, you need to decide if you would rather own your business completely or if you would like to have a larger and more successful business that you are not sole owner of but will be bigger and better as a result.
LegalNature can help you with all of your legal form needs. Let us help you get started today. Click here to create your business plan now.
Can't find what you are looking for?
Contact us here.