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About Venture Capitalists: A Little Background
Access to capital is a major topic of discussion for most entrepreneurs. Success in finding funds to incubate or grow the business requires an understanding of Venture Capitalist objectives and strategies. Unless an MW/DV BE can align itself with those goals and objectives, it will be difficult to acquire investment in the business.
Venture Capital is a mechanism for obtaining funds for a business, and like a business loan, it requires a return on investment. Unlike loans, the funds are provided in exchange for equity ownership in the business. The exchange for equity gets you the funds without having to make the monthly loan payments, therefore allowing you better use of the cash flow. Venture Capital normally takes the form of common stock, preferred stock convertible to common stock, or debentures convertible to common stock.
The amount of the "Rate of Return" is probably where most business owners fall off their chairs. A venture capitalist's objective is to obtain above-market rates of return. Current per annum market rates of return for high-risk investments are in the 25 to 30% range. This becomes the floor for most venture capitalists. If you are looking for venture capital, you must be willing to offer high rates of return. You should keep in mind that 75%, or even 30%, of a $1 billion dollar company is better then 100% of a $10 million company.
Typically, Venture Capitalists do not get involved in the management of the business. If the concept is good, but the confidence level of the management team is low, the Venture Capitalist will insist on changes to the management team and to the board of directors. They will bring market, technical or business expertise and key contacts to the enterprise. Venture Capitalists get involved in managing the business when the business owner fails to live up to the commitments of the relationship, and/or when the investment is at risk.
A Venture Capitalist typically invests in businesses with high growth potential. Companies with new products or in emerging markets are normal targets for venture capitalists. Venture Capitalists love high potential products that have little competition in the marketplace. If you are looking for capital just to ease your cash flow, a Venture Capitalist is not the person to seek.
It is important to understand that a Venture Capitalist is not looking for a long-term relationship. A Venture Capitalist expects the rate of return to materialize and to be out of the relationship within 4 to 7 years. This means that you have to plan for the VC's exit. At maturity, VC's may seek a management Buy-Out, the issuance of a Initial Public Offering of stock (an IPO), or have the enterprise merged into or purchased by another company.
If an MW/DV BE is going to approach a venture capitalist, we recommend the following:
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