Capital is the lifeblood of businesses. While no amount of money will make a bad business successful, no business can survive without enough money to develop products, hire employees, establish markets and attract customers.
For those businesses, venture capital may be the best hope to raise the money need to succeed.
What is venture capital?
Venture capital is not the answer for all business in need of capital. But for those businesses that offer the potential of rapid growth and the potential for considerable profit, informed investors are ready to open their checkbooks.
Businesses that offer the potential of rapid growth and the potential for considerable profit, informed investors are ready to open their checkbooks.
These high growth businesses not only offer the prospect of substantial returns to owners and investors, they also create new jobs and strengthen the economy.
State government has recognized the importance of supporting these next generation companies and has the provided substantial resources to assist entrepreneurs in raising capital.
Venture capital is money provided by individual investors or entities seeking a high return on their investment in investment in privately owned business ventures.
In order to get those high returns, venture investors are willing to accept a relatively high degree of risk of loss of their environment.
Some entrepreneurs complain that banks will only lead to businesses they do not need the money.
The 4 Main Categories of Venture Capital Investors
There are four main categories of venture capital investors :-
- Venture Capital firms
- Angel investors
- Corporate venture capital Investors
- Government Investors.
Venture Capital Firms
Venture capital firms are entities, usually limited partnership or limited liability companies, that raise funds from high net worth individuals and institutional investors to invest in a portfolio of business.
Of the four main categories of venture investors, venture capital firms are the most focused on generating the highest possible return on investment.
There are many different types of venture capital firms with different styles, investment targets, and return expectations.
Angel Investors
Angel Investors are high net worth individuals who invest in as few as one, or as many as a dozen or so businesses, usually located near their home.
Angels Investors are attractive sources of capital for businesses for several reasons.
First, they tend to be some what more accommodating to entrepreneurs than venture capital firms because they are investing their own money and have greater flexibility in making investment decisions.
Second, they are willing to invest smaller amounts of money than venture firms.
Third, Many angels have valuable experience and contacts from running their own businesses that can be useful to entrepreneurs.
Finally, Angel investors may be interested in making an investment for reasons other than purely financial ones, such as share their experience with a local business, help out friends, or strengthen their community.
Most angel investors do not advertise their investment interest, leaving it up to the entrepreneur to find them.
The best way to find an angel investor is through the entrepreneur’s existing network of friends, relatives and business contacts.
Corporate venture capital Investors
Corporate venture Investors are companies that have their own business operations but that also make venture capital investments in smaller businesses.
The primary difference between a corporate venture investor and a venture capital firm is that corporate investors usually invest in businesses that offer a strategic benefit to the investor’s business or that might be potential acquisition candidates in the future.
Corporate investors is usually a matter of determining which companies might have a strategic reason to be supportive of the entrepreneur’s business.
Government Investors
State and federal governments play a significant role in providing financial assistance to growing businesses, often on better terms then can be obtained from private investors.
Financial assistance programs target job creation, rural development, research, and other public benefits.
The primary applicable program of the Federal government is the small Business Innovation Research (SBIR) Program.
Small Business Administration (SBA), the SBIR program is a great program designed to support research and development activities by small businesses.
The SBA also administers the small business Investment company (SBIC) program, which provides investment capital to licensed venture capital companies that meet SBA criteria and observe SBA rules and regulations.
7 Core Investment Principles of Venture Firms
Maine Entrepreneurs want to know whether venture capital is right for them, where to find it, and how to get it. It explains what venture capital in, how venture capital investors work, what they are looking for, how to approach them, and what to expect when it comes time of structure an investment.
It is important for entrepreneurs to understand how they work, what they are looking for, and what is important to them.
Success in raising money depends first and formost on how well the entrepreneur makes the case that the business will be successful and produce an attractive return on investment.
It is important for entrepreneurs to understand that in order to raise capital from venture capital firms, they will have to offer a reasonable prospect of paying much higher returns to the investors then these portfolio averages.
Each firm has its own strategy. However, the following investment principles guide most firms :
1. Be highly selective: – The reality is that venture firms may look at the reject 100 or more investment opportunities for each one they fund. Most successful venture firms have a “deal flow pipeline” that brings in hundreds of qualified business plans each year. The managers can afford to be extremely selective about where to invest their time and money.
2. Unfair Advantage:- Seek companies with innovative products and “unfair” advantages in large, ripe markets. This generally requires both a technical or product advantage, and a market that is ready to reward that advantage.
3. Back outstanding management terms:- Many venture investors believe that a strong management team will be successful. While a poor management team will not get the job done no matter how good the product. Some venture firms will only back teams that have shown the ability to manage a business successfully in the same or a similar industry.
4. Realistic Exit Strategy:- Invest in companies with a clear and realistic exit strategy. Making an investment is only the beginning for a venture investor. Venture capital firms want to be close and effective partners with their portfolio companies, but only for as short a time as necessary to prepare the company for a profitable exit opportunity.
5. Value Addition:- Add value to the development of the business and play a significant role in the going management of the company. The ideal investment is one where the venture form has the experience, contacts, and the strategic relationship to add significant value to the venture beyond the money invested.
6. Access to Cash:- Make sure that companies have access to enough cash to get to cash flow beakeven. Many companies have foundered because they were unable to raise more money when their venture capital.
7. Diverse Portfolio:- Build a diverse investment portfolio. Particularly for seed and early stage investments, seasoned venture investors know that it is very difficult to predict which investments will succeed.
The prospective investors will then draw upon their own experience and contacts to make independent inquiries about the product or service and the market the company is focusing on.
They will perform background checks on the management and talk to customers, suppliers, and competitors.
Successful investors strive to know the business almost as well as the founder or chief executive officer such as patents, copyrights, trademarks etc.
Final Thoughts
At last words, For an entrepreneur Venture investors is the best way to be successful in approaching investors is to offer them a well-constructed investment opportunity that meets their goals and objectives. When you approach a Venture Capital or angel investor, don’t just praise your product; show them that you have a strong management team, a large market, and a clear exit strategy that aligns with their financial and strategic objectives.
