Whether you’re a new business starting out or are just contemplating a major expansion, venture capital may be a solution. This unique type of funding source works to provide businesses the funds they need to expand. However, before you start looking to obtain this type of financing, there are some basic things you should understand first. First, you should know that not all businesses are worthy of venture investments (at least to the investors eyes. You should know the way venture capital works between partners, and understand their fund cycles. In addition, you should know that many venture investors will only fund those who are referred by their network. Be prepared for a lengthy introduction period, and start making connections now. Read on for more information on each of these aspects of venture capital.
Not All Businesses Are Worthy of Venture Investments
While venture capital investments are great for small and mid-sized businesses looking to expand, not all have the potential growth needed to get the attention of venture investors. There’s a big difference between venture investors and other types of investors. For instance, angel investors may cut your business a check for a few hundred thousand dollars. However, venture investors will be more concerned with cutting checks for millions of dollars. Therefore, it only makes sense for venture investors to invest their money in a company that has an idea that is worthy of large growth. Unless you have big dreams of expansion, you may want to look at a different form of capital investment. However, if you have a million dollar idea and previous successful business enterprises, venture investments may be perfect for you.
Know the Interworkings of VCs
You will need to know the complicated interworkings of venture capital in order to succeed. Venture capital is made up of limited partners and general partners. Limited partners are those who simply invest passive money. The general partners are those who manage the investments. The general partners make their money through carry and management fees. The carry is about 20 percent of the returns from the venture capital. In order for investors to receive money, all the original money must be paid back first. Understanding this will help you be able to justify your investing needs.
Understand Their Fund Cycle
Each VC will have a specific fund cycle that the venture investors specify at the beginning of their fundraising period. Most venture investors will invest their capital in multiple businesses known as series. A specific investor may decide to invest in two series per quarter. If a potential investor that you’re talking to has already performed two series deals this quarter, it’s not very likely they’re going to invest in your business at this time. You can get a better understanding of a venture capitalist funding cycle by talking with companies like Outsourced Trading Solutions.
Many VCs Will Only Consider Funding Those Referred by Their Network
In addition, you should know that venture capital is very much a networking game. While it’s completely possible to get information about VCs through news articles and online sources, that’s not the ideal way to do so. Many venture investors want to be introduced to you through someone in your network. This is because a company founder who is willing to tap their own network connections to get an introduction with a venture investor is one that will strive to enhance the business.
Be Prepared for a Lengthy Introduction Period
General partners in a VC are responsible for making good investments for all the partners involved. This means that they’re going to spend a great deal of time analyzing every potential investment before making the final decision to get on board. As a business owner, you must be prepared for a lengthy introduction period where the general partners will evaluate your business, skills, and everything else you can think of.
While venture capital is a great asset to expand your business, it’s not an easy one. Hopefully, you have a much better idea about the venture capital process now that you have read through the information provided above. Think of venture capital as a very important long-term investment that must be cultivated.
Brooke Chaplan is a freelance writer and blogger. She lives and works out of her home in Los Lunas, New Mexico. She loves the outdoors and spends most of her time hiking, biking, and gardening. For more information, contact Brooke via Facebook at facebook.com/brooke.chaplan or Twitter @BrookeChaplan
Venture capital stock photo by Akira Kaelyn/Shutterstock
