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Venture Capital Financing: What Is It and Is It Right for You?

There are many different ways that you can fund a business. If you do not have your own money to fund the entire business, or even any of the business, venture capital may be a great option for you to consider.

What Is Venture Capital?

Venture capital is a type of financing that can be obtained through investors. Investors commonly give funds to startup companies and small businesses. They do not do this for just any startup or company; they provide financing to those that they think will have long-term growth potential and companies from which they believe they can get a good return on their investment. For some markets, it is imperative to get additional financing from outside sources unless there is a lot of money to work with, which is what makes venture capital a great option. For investors, the risk can be very high, but in return for the investment the investor may also get a stake in the company. That means that they get a say in company decisions. While the risk may be large, the potential for above-average returns is what is very enticing.

Venture capital can come from the following sources:

  • Individual investors with a lot of money
  • Financial institutions
  • Investment banks
  • Other types of partnerships

With loans and other types of debts becoming harder to obtain, venture capital is a very viable option. It does not always have to be in the form of money; it could also be a form of expertise for the business, such as technical or managerial, to help it prosper. Additionally, it could be the added connections that the investor brings to the table. This alone could be a great benefit for a company that is very new to the market and does not have experience or contacts.

What Are Angel Investors?

Another term that is consistently used with venture capital is "angel investors." But what exactly are angel investors? The venture capital that is provided to many startups and small businesses come from high net worth individuals, or HNWIs. They are also known as angel investors. The money can also come from venture capital firms, but these are not exactly angel investors unless it is an angel investor firm.

An example of a venture capital firm is the National Venture Capital Association (NVCA). It is made up of several venture capital firms. This is different than an angel investor because an angel investor group is usually a group of diverse individuals with wealth that has been accumulated through a variety of means. The majority of angel investors are actually entrepreneurs as well, but this is not a qualification for the classification. It is also usually a group of individuals that have retired early from their various ventures that have become very successful businesses and even empires. These individuals are usually looking for a way to continue growing their money through investing instead of being the ones that are on the ground running the business. Many of them are looking to invest in a company that is well managed and has a solid business plan that is fully developed.

Potential for Growth

Investors also like ventures that have the potential for a fair amount of growth so that their investment can get a quality return. If they do not see this in the venture, there is a slim chance that they will invest any of their own money into it.

Additionally, it is also common for many of these angel investors to choose to invest in ventures that are within the same industry or specialty that they are already familiar with and have likely done business in before. This is because they have a good understanding of these industries and specialties so they know what has a good chance of succeeding and what has a good chance of failing. They feel more comfortable investing in things that they already have a good understanding of. This is not a requirement, and there may be some angel investors who do not follow this pattern. Another thing that is not uncommon is co-investing, where two or more angel investors get together to provide the venture capital. They may also do this with a friend or associate that they trust or that they have worked with in the past. This is also where angel investor groups come into play, as mentioned before. There may be some angel investors that prefer to be part of a larger firm for the purpose of investing.

What Is the Venture Capital Process?

If you are interested in finding some venture capital for your startup or small company, it is important to know the process so you can be successful. The very first step that you should take is to create a business plan. A business plan is a key component because without it, your startup or small business will likely not even be considered. In the business plan, you should detail the following information:

  • The basis of the business
  • How you plan on running the business
  • If you have any competitors and what they are currently doing
  • How you will stand apart from other companies

This should be a very thorough plan that can be used to convince a venture capitalist to invest in your company, but it also serves as the blueprint for your business and your path to success.

What Are the Advantages of Venture Capital Financing?

There are many benefits of using venture capital financing to fund your business. These are just a few that you can enjoy through the process:

  • Financial backing – This is the biggest advantage for many startups and companies. Without the initial financial backing, it may be difficult for a company to get off the ground. Beyond that, it can be difficult to grow at the desired rate. With financial backing, you can put your plan into overdrive.
  • Business expertise – By choosing to go this route, you often not only get the money that you need but you also gain the wisdom of someone or a group of people who have been doing this kind of thing for some time. You can get guidance and consultation on various business decisions so that you can do the best for your company. With this kind of help, you will not have to make all of the same mistakes that they did when they were first starting out. This includes financial management so you can use the money more wisely than you would do on your own. This is a very important component of growing your business.
  • Connections – With the right person on your team, you will also gain access to their connections. Building connections in an industry can be invaluable. You can gain a lot more from these connections and you should use them to your advantage.
  • Other resources – There are so many other resources that you can use to your advantage, and the right person or group will have these available to you. These include resources for legal issues, tax matters, and even personnel matters. With a venture capital firm you should have this active support at all times, and an angel investor likely has these resources through other methods. These resources can help make your business more successful.

What Are the Disadvantages of Venture Capital Financing?

Even with a lot of advantages that you can enjoy, there are also some disadvantages to consider before you dive into this method. These are the main ones to consider:

  • You may lose control of the company – Depending on how much money is invested, you may find that some investors want to have a bigger stake in the company. If you are not careful, even if they do not own more than you, they could run away with the company, especially if they are aggressive. You will want to keep as much of the company as you can and stand your ground if they start to completely change the direction of your company.
  • You run the risk of becoming a minority owner – Another disadvantage is that if the firm or investor decides that they need a large portion of your company—50% or more—you could become a minority owner. This means that you would no longer own your company completely and you would not have the final say in any matters.

How to Decide if Venture Capital Is Right for Your Company

When you are trying to determine if it is the right option for you, you need to be very thorough in your examination. You should consider whether or not you would be open to the active input of an investor. If you do not think you will be open to any feedback or suggestions, then this is not the right method for you. You should also consider whether or not you would be ok with losing some of the ownership of your company. If you want to own 100% of the company, then you will not be able to come to an agreement with an investor. On the other hand, if you think that you need those resources and could benefit from the expertise that comes with an investor, then it would be a good option to consider. When it comes to venture capital, you need to decide if you would rather own your business completely or if you would like to have a larger and more successful business that you are not sole owner of but will be bigger and better as a result.