Obtaining venture capital is substantially different from raising debt or applying for a loan from a direct lender, like a bank. It takes time, effort and energy to create a compelling sales package that venture capital groups will review, find interesting, and work to fund.

Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business. Venture capital elects to be invested in exchange for an equity stake in the business. As a shareholder, the venture group’s return is dependent on the growth and profitability of the business, which is based on success achievement. This return is generally earned when the venture capitalist \”exits\” by selling its shares when the business is sold or divested to another owner.

Funding

Whereas a lender is legally entitled to interest on his loan and can take legally take collateral to satisfy debts, venture capitalists own equity in the company and therefore can often be the last in line if the business fails to generate enough capital to pay the investment back.

A lender earns returns from interest on the funds injected. Equity holders earn returns from profits and company growth. The venture capitalist earns the majority of their returns when they dispose of their stock— which explains why they may study up to 400 different potential investments before they select one in which they want to invest.

The challenge is for you to develop a business case for your project that makes it the one in 400 potential investments they simply must make.

Since VC firms can logically expect to hold an investment for as long as seven years, they are interested in ventures which offer potentially incredibly high growth rates to make up for the long waiting period. In comparison, a home is seldom held for more than seven years and that is considered to be a very illiquid investment.

Companies that seek venture capital typically have high up-front set-up costs.

Because startup companies rarely demonstrate strong cash flow and generally can offer few assets to serve as collateral, VC investors may represent the only source of high levels of funding. This “only source” position can make VC money very expensive to the business owner, requiring them to give up far more of their equity than they would normally like to surrender.

Preparation

A VC firm’s ultimate goal for a company is usually to take it to the public markets (Stock exchanges) whereby a share stock that they may have acquired for a dollar is sold on a stock exchange for $20 or more. As a venture capitalist, for example, Mitt Romney acquired a net worth of $250 million before his run for the US presidency in 2012.

Business owners who want to take their businesses public know this is the high road of wealth creation. These business owners will start a company, make it very profitable, and eventually take it to the stock market to sell off shares they acquired for one cent for $20 or more. Bill Gates, the late Steve Jobs, and all of the Walton family plus and a large number of The Forbes 400 Richest Americans amassed billions in wealth through IPO stock sales.

To prepare for such possibilities venture capitalists assist in four defined stages of a company’s development. Let’s look at each of these four and apply some ideas to each stage:

1. Idea generation: An idea that can be used for business purposes. If you have an idea, how you apply the various attributes of business to that idea can make an immense difference in the mid-term and long term success of the venture.

2. Start-up: “A startup company or startup is a company or temporary organization designed to search for a repeatable and scalable business model.

3. Ramp up: Ramp up is a term used in economics and business to describe an increase in firm production ahead of anticipated increases in product demand. Alternatively, ramp up describes the period between product development, and maximum capacity utilization, characterized by product and process experimentation and improvements.

4. Exit: In VC terms, the Exit is the selling off of the VC’s equity to achieve profits or to mitigate losses.

Finding a Venture Capital Firm

There are no public exchanges listing VC stock for private companies therefore companies desiring VC investors usually meet in methods such as:

– VC sponsored investors conferences and seminars. These have become big business in recent years, where a group will put together ten or twenty representatives of venture capital firms, who come together, meet with potential referrals-as well as potential investors—and begin the “courtship ritual.”

– Internet searches or online listing companies. One prime example of this is the website www.GainStreamGroup.com. Gain Stream Group has compiled, contacts, determines the legitimacy of, and then makes venture capital groups and contacts available to those searching for specific types of lenders. The advantage of a Gain Stream Group over purchasing or just using a blanket list of lenders is that Gain Stream Group looks at the stage your business is in, helps assess the area of lending that would be most helpful, and targets the lenders contact info that you receive to a class and type of lender that would be best able to meet your lending needs.

– Referrals from business associates. Often, you will meet and become acquainted with others in your specific industry, and these contacts may be quite helpful in putting together a list of lenders who may have financed their projects along the way.

It is very important to verify that the VC firm you are interested in working with is a legitimate firm and not a group of criminals attempting to steal your business idea or in some way defraud you of funds.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services.

Author Bio: Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services.

Category: Finances
Keywords: Finance,Business Funding,Venture Capital