Venture Capital Basics © Paul Wetton

If you have a business idea but don't qualify for bank financing and have already hit up your friends and family then venture capital is an option.

If you already have an established business that would give an excellent return on investment then venture capital is also an option.

Venture capital is money invested by professional investors.  The venture capital firm gets shares in your company in exchange for funds. 

In most cases the venture capital firm becomes a partner and provides active management to help reduce the risk of the investment.

Businesses that receive venture capital can become strong competitors.  Companies such as Apple, Intel, Microsoft and Federal Express were launched with venture capital.

Why would venture capitalists want to take a risk on investing in your business? 

There's the potential for bigger returns in investing in high growth businesses than there is in traditional investments. 

As a result, venture capitalists aren't passive investors. 

They become involved with your business. 

The greater the risk, the more the business needs to pay off and the more involved the venture capitalist will be.

You need to go to meetings, fill your database with contact names, do whatever it takes to meet venture capitalists in person.  Contact friends who may know venture capitalists. HINT: Contact Me!

Just like the venture capitalist researches potential portfolio companies, you should research the VC firms and also the VC market.  Make a short list of potential VC firms to contract.  Make sure you know about their management teams, investment philosophy and portfolio history.

If a venture capitalist asks to see your business plan you need to be prepared. Make a 15 minute Power Point presentation that clearly describes your business.  Memorize the financial details of your business so you can quickly and competently rattle off answers to any questions that the venture capitalists will ask during a meeting.

Venture capitalists usually expect at least a ten-fold return on their investment within 3-5 years.  Depending on the size of the firm, initial investments range anywhere from $1 million to $1 billion. 

Science, technology and bio-tech are popular markets but are by no means the ONLY markets.  VC firms specialize in particular industries and stages of investment.

These are the stages:

• Seed stage.  These firms invest in companies at the very beginning and provide funds to help spur growth.

• Expansion.  Companies that show potential for growth and high profit potential.

• Acquisition/buyout financing.  The investor purchases 50% or more of the company and gets control of it.

• Leveraged buyout.  An investor purchases the company with debt, using the acquired company as collateral.

Some VC firms are subsidiaries of a large corporation, such as an investment bank.  SBIC (Small Business Investment Company) firms get their funding from the Small Business Administration.  Other VC firms are private and receive their capital from their general partners.

Avoid these 10 things when seeking venture capital:

1. Asking only for money. VC firms don't passively give you a check and sit back and watch.  They are involved in the decision-making of your business and are partners.  Make sure your business plan shows how the VC firm will be involved with your business.

2. Low ROI. Venture Capital firms usually expect 40% or more on their investments. If you can't match that, then your company is not enough of a high-growth company for venture capital.

3. Lack of analysis of competition.  Every business has competitors and rather than remain in denial about this you should fully acknowledge who your competitors are and name them by name. Don't underestimate them.

4. Wishful thinking.  Even if you think your company will be worth several billion dollars in five years, remain conservative in your numbers.  You have to have rock solid evidence for your numbers.

5. Overvaluing.  Evaluate your company according to the standards of your market.  An overvalued company is a bad investment for a VC firm.

6. Too many bells and whistles. Venture Capitalists don't need to be bombarded with graphics and charts. They're looking for new ideas and a compelling argument. Your Business Plan needs to look professional, professional, of course; it just doesn't need to look like a 3 hour documentory.

7. No connections. Venture Capital firms prefer personal recommendations from people they know and trust. To increase your chance for a good response from a VC firm, make sure someone recommends your plan to the firm. You need to network, make phone calls, go to meetings, ask for favors.

8. Lack of profitability. If your company has been around for a while and is not a start-up then your need to demonstrate profitability to increase your chances of getting VC funds.

9. More than a five year return. Most Venture Capital firms want a ROI (return of investment) in five years or less. If you can't show that your company will turn a profit that quickly then you won't receive VC funds.

10. Not building trust.  VC firms like to conduct business in the beginning stages with handshakes.  Don't whip out with contracts and legalese.  Build trust and build a relationship with the venture capitalist.  Don't approach the venture capitalist like they are merely an ATM machine.  Seek our venture capitalists that come recommended from people you trust.

Questions? Use our simple Contact Form  or call me nationwide in Australia on 1300 30 42 62