Entrepreneurs and business owners have great business ideas but often they do not have the capital to complete their transaction. They spend a lot of time searching for angel investors, seed capital, early stage financing, mezzanine financing. The cheapest way to start a business is to beg borrow from family, friends and use the equity of your house or credit cards. Although credit card interest rate is high, it is still cheaper than venture capital financing.
Venture capitalists are individuals or pools of funds looking for businesses which have an excellent opportunity of succeeding. They typically finance later stage businesses but there are some funds around who will invest in early stage businesses. Venture capital firms typically take an equity stake in the business, a board of director seat, a return on their loans which they want repaid and a percentage of the profits of the business.
Venture capital firms and angel investors take risks and for that they want to be rewarded very well. To compensate for their risks, they look for a high ROI (return of capital). For every 10 investments made by a venture capital firm, they are hoping that two will be extremely successful, a few will break even and they will lose their entire investment on 2. As a result, the ones which succeed must more than make up for the losses on the other investments. Venture capital firms will monitor the business closely and if the budgeted sales and expenses are not met, they will become more active in the business and could take over the business if the business deteriorates significantly.
Venture capital firms get many applications seeking funding daily. Of all the applications, they only chose to examine a few closely. Since venture capital firms represent other people’s money, they scrutinize the investments very closely and try to pick the winners. Since they are receiving so many applications, the entrepreneur’s application has to be excellent, concise, well researched and include an excellent business plan, a detailed analysis of costs, start up costs, the timing of when capital is needed, projected profits detailed analysis of competitors, comparison of your business with the competitors and why you will be successful. It is important to identify the timetable of when the company is expected to become profitable.
If they can make an impression on the venture capital firm, the second step is often a meeting. The entrepreneur must provide a professional presentation. This is crucial for funding and for the venture capital firm to form an opinion of why are you a good person to trust and run a business, is your idea well thought out, is it feasible, have you tried to think of many different possible risks of running the business or are you so optimistic that you are not providing a realistic image of the business. You need to be clear about your values, your background, the company goals, why the venture capital firm should invest in your business and what are the benefits and rewards for the venture capital firm in the future.
It takes more than a good business idea to be successful. Funding a company until it is cash flow positive is not an easy proposition and takes time and planning and a well focused business to become successful. Not every business is successful but if your plan is well thought out, it minimizes the risk of failure.