Is Venture Capital Financing Right For You?
How will you find the money to turn your dream business into reality? Fortunately, we live in an age where financing possibilities go far beyond standard bank business loans. Whether you’re contemplating a start-up or ready to expand your already successful business, research all of your options so that lack of planning doesn’t cost you more in the long run. One of those financing options is through a venture capital firm.
Venture capital firms use the money of high-net-worth investors (sometimes referred to as “angel investors”) who want to significantly increase their returns by injecting their money into riskier companies for a higher return on investment. The funds are professionally managed and typically reserved for potentially high-dollar emerging growth companies with the potential to achieve $ 25 million in sales in five years. Some venture capitalists may require an equity stake and an active role in their business as a condition of association. An active role may include a board position, sales and marketing planning, or decisions related to corporate governance. The amounts you can borrow vary, but the average is $ 500,000 to $ 10 million. Getting money from a venture capital firm is not appropriate for all businesses. Each company adheres to an investment profile, which limits the types of businesses in which it invests. This allows members of the firm to become more versed in a particular field, subsequently enhancing the possibility of investing successfully.
Venture capital firms take risky investments that banks may reject; therefore, it is difficult to obtain funds if you have not thoroughly prepared your business plan. Also, be prepared to pay a higher interest rate than what you would pay for a bank loan.
Once you’ve researched the risks and benefits of partnering with a venture capital firm and decided to move on, here’s what to expect:
• VC members review your business plan. If your business meets the VC criteria for business type, stage of development, etc., members will meet with you to take the next step, which is …
• Perform due diligence. This is perhaps the most important step in the process, as it can make or break your chance for financing. You pay in great detail to the figures behind your plan: your company’s financial statements, details about your management team, and corporate governance documents, to name a few.
• Make an investment: Once the VC members have decided to go ahead with financing their business, a Term Sheet is drawn up. This sheet describes the terms and conditions under which the money will be awarded. If you agree to these terms and conditions, the money is invested and you, in return, provide the agreed share capital in your company, mitigating the risks to venture capital. The money is paid in installments according to the milestones established in the agreement.
• Going out of business: CVs cut ties with companies at some point, usually within four to six years. This generally occurs through mergers, acquisitions, or IPOs that are made possible by the venture capital firm’s business ties. This is also the time when the initial loan is repaid, with interest, and the money is returned to high-net-worth investors. Repayment through shares is also sometimes acceptable.
Although the stakes are sometimes viewed as higher, starting a business with a venture capital firm can prove to be a valuable strategy for some companies. For others, there may be more beneficial financing options. It is vital that you research and use the advice of professionals who specialize in the practice of your business legal affairs.