With almost unlimited opportunities the advancement in technology is creating over the past 2 decades, many startups and small businesses today often seek for capital that might bring their dream business to success. While there is a wide variety of financial sources that they can tap on, these types of entrepreneurs are hesitant in borrowing money from banks and financial lenders due to the risks involve. But positive thing is that they've found a good alternative and that is by raising venture capital from the venture capitalists or VCs.
Venture capital is that amount of cash that VCs will invest in trade of ownership in a company which includes a stake in equity and exclusive rights in running the business. Putting it in another way, venture capital is that funding provided by venture capital firms to companies with high possibility of growth.
Venture capitalists are those investors who have the capability and interest to finance certain kinds of business. Venture capital firms, on the other hand, are registered financial institutions with expertise in raising money from wealthy individuals, companies and private investors - the venture capitalists. VC firm, therefore, could be the mediator between venture capitalists and capital seekers.
Because VCs are selective investors, venture capital isn't for all businesses. Just like the filing of bank loan or seeking a type of credit, you will need to show proofs your business has high possibility of growth, particularly during the initial three years of operation. VCs will ask for your company plan and they will scrutinize your financial projections. To qualify on the initial round of funding (or seed round), you have to ensure that you have that business plan well-written and your management team is fully ready for that business pitch.
Because VCs would be the more knowledgeable entrepreneurs, they want to ensure that they can improve Return on Investment (ROI) as well as a great amount in the company's equity VC Scout Programs. The mere undeniable fact that venture capitalism is a high-risk-high-return investment, intelligent investing has long been the typical model of trade. An official negotiation between the fund seekers and the venture capital firm sets everything in their proper order. It starts with pre-money valuation of the business seeking for capital. Following this, VC firm would then decide on what much venture capital are they going to put in. Both parties must also agree with the share of equity each will probably receive. In most cases, VCs get a portion of equity which range from 10% to 50%.
The funding lifecycle often takes 3 to 7 years and could involve 3 to 4 rounds of funding. From startup and growth, to expansion and public listing, venture capitalists are there to help the company. VCs can harvest the returns on their investments typically after 3 years and eventually earn higher returns when the business goes public in the 5th year onward. The odds of failing are usually there. But VC firms' strategy is to invest on 5 to 10 high-growth potential companies. Economists call this strategy of VCs the "law of averages" where investors feel that large profits of several can also out the little loses of many.
Any organization seeking for capital must make certain that their business is bankable. That is, before approaching a VC firm, they should be confident enough that their business idea is innovative, disruptive and profitable. Like every other investors, venture capitalists desire to harvest the fruits of the investments in due time. They're expecting 20% to 40% ROI in a year. Aside from the venture capital, VCs also share their management and technical skills in shaping the direction of the business. Through the years, the venture capital market is just about the driver of growth for 1000s of startups and small businesses round the world.