If you want to know all about venture financing, this comprehensive article is going to prove very helpful.
It reveals a lot about venture financing, what it is and very powerful tips to help you, regardless of what stage you are in the process of looking for venture financing.
Why Venture Financing?
First things first…
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Their inception and subsequent success were due, in some part, to investments from venture capital firms or venture financing.
Uber and Venture Financing
Several years ago, an innovative transportation service, were formulated from an idea using an app.
The app connected an individual needing a ride with an independent contractor who owned a vehicle. The match was made in travel and business heaven.
Google Ventures shared Uber’s vision Uber and invested capital financing into the starting of this company and its driving success.
The initial investment by Google Ventures was $250,000,000. Other big-name investors included Kleiner Perkins, Caufield, and Byers, Fidelity Investments, Jeff Bezos of Amazon, Goldman Sachs, BlackRock, and other investors.
Of course, the return on investment by these venture financing individuals remains to be seen as to whether their investment will pay off or not.
However, Uber has been one of the pioneers in this transportation system of connecting private contractors with customers.
What is Venture Financing?
If a startup company or small business requires an infusion of cash to empower its vision and business plan, an option is to reach out to venture capital firms.
These types of firms view these opportunities as an investment based on the business idea and how it will meet a need to a broader range of a potential customer base.
Return on investment by investors in these venture financing firms anticipates a greater than average return on their investment.
Venture Financing Companies
Venture capital companies or firms are investment firms that not only potentially provide funding for a startup company but also can offer consultation and mentoring opportunities for those entrepreneurs who may be lacking inexperience.
If a company is a beneficiary of a venture capital investment, the monies provided do not require an interest rate of return on that investment, but the venture capital company requires a portion of the equity of the company.
To obtain the needed investment resources to invest in startups, a capital venture company will solicit a variety of commitments from limited partners.
Some of those limited partners could include endowment funds from colleges or universities, pension funds, etc.
Individuals or investors that work at venture capital firms are known as venture capitalists.
These individuals aggressively and actively seek out opportunities for venture firms to invest in.
The other aspect of their duties is to approach individuals, organizations, or funds to convince them to invest in the venture financing company.
The attraction to these limited partners is the possibility of having a significant return on their investment.
As of this writing, there were well over 5000 active venture capitalist investors. Putting this number into context, this has been a significant increase of roughly 163% over the past several years.
Differences Between Venture Capitalists and Investors
An individual might be familiar with the television show known as Shark Tank.
There are some similarities between venture capitalists and the reality of Shark Tank investors on the business reality TV show.
However, the significant difference is between the two types of investors.
This type of investor is known as an angel investor and is defined as an individual with significant wealth who invests in a promising company to help them get their business vision, mission, and ideas off the ground.
The business investors on the shark tank are prime examples of angel investors.
How Does Venture Financing Work?
As companies begin to form or as they go through growing stages, there may be a need for significant investments.
This significant investment can be received through venture capital firms.
Generally, the venture money that is solicited is utilized for the development of the product, conducting market research, or formulating the business plan.
Often, the return on investment to the venture company is through stock options provided by the new company.
Corporate Venture Capital
This process involves the venture capital firm conducting investments to representatives of larger companies.
Typically, these corporate venture capital companies have an investment process in which they also invest in startups.
Often these companies are strategic in their investment as they will operate within or parallel to their core industry.
These companies invest in startups to gain an advantage competitively and or to increase their revenue.
Unlike venture capital companies, the money for corporate ventures is not from investors but the money is actually from the corporation or company.
Making Money with Venture Financing
The primary revenue-generating model for venture capital companies to earn revenue is by assessing 2 types of fees.
The first fee is known as a management fee and can roughly be 2%. This 2% is a percentage of the assets of the company startup company that is being invested in.
The 2nd type of fee is known as the performance fee. This fee is generally calculated at a level of a 20% return.
This 20% is taken from the profits of the company that has been invested in.
Generally, these performance fees are provided as incentives to the employees of the venture financing company.
The idea is to keep them energized to seek additional investors and distribute as incentives.
Venture Capital and Private Equity
It is also important to distinguish between venture capital and private equity.
Both have the same ultimate goal in mind. That goal is to make sure that the company invested in is successful and therefore turns a profit.
With the company turning a profit, then the investment stake or return on the investment is ownership shares. These shares are then sold for a profit.
Although these two investment processes seem to be the same, they are different.
The difference is their focus on what companies they invest in based on the types and size of the companies, different levels of invested money, and different percentages of equity pursued from the companies invested in.
Additionally, some venture capital firms prefer to focus on the financial needs of the various stages that the company may find themselves in.
Specifically, they may focus on the initial beginnings of the company or what is termed as the seed stage.
As this stage implies, this seed beginning is an opportunity for the company to obtain its first round of funding.
Related: Pre-Seed Funding… and everything you need to know!
Once the company has successfully grown beyond the seed stage, they come into the stage known as the early stage.
Any venture monies or funding that are received during this stage are utilized by the new company to continue to develop and solidify the company’s businesses processes.
Generally, this early-stage venture capital is more significant than the seed stage.
This is because more funds are required by the business to start their operations and engage customers.
The final stage of venture capital investments is known as the late stage.
Generally, venture capital is provided in this stage to these companies to help them continue operations as they are probably not at the point of being able to return a profit.
However, the venture capital investment is worth the risk because the proven potential of growth and generating revenue has been established.
During this phase, the venture capital firm may choose to sell some or all of the shares that were provided as a return on their investment.
These shares can be sold to other investors with these other investors being termed as a secondary market.
How to Apply for Venture Financing
To apply for venture financing, it is important to determine what is the focus of the venture capital firm.
This is critical as these companies need to stay true to their mission and the interest of their investors.
As one can imagine, competition for financial support is aggressive. The best way to apply is to have a connection or link with the venture financing firm.
This can be accomplished by having a common colleague, business associate, attorney, etc.
Of paramount importance is to have your presentation finely tuned and ready to be given at a moment’s notice.
The “pitch” should be sincere with a blend of good common business sense coupled with passion and vision.
What if Successful
Once the presentation has been delivered to the venture financing company, the possible investment opportunity is presented to the investment committee.
Various factors are considered including the business plan, people involved with operations and oversight, determination of risk, etc.
If the investment opportunity is endorsed by the committee the “term sheet” is drawn up and is a fairly good indication that the venture financing company is moving forward.
How Long Does the Process Take?
It is important to remember that the process is involved.
For the most part, it’s not a Hollywood movie in which the success of the entrepreneur is realized within two hours.
It takes time, commitment to your vision, developing a strategy, and doing one’s homework to connect your idea with individuals who can make your idea a reality.
Therefore, patience is the watchword.
Typically, the time between receiving a term sheet to the point of having money deposited in the business’ banking account can range anywhere from 45 to 90 days.
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Venture Financing FAQs
What is a Term Sheet?
This is an important document prepared by the venture financing company and presented to the entrepreneur.
It is a good indication that signals to the applying business that there is serious consideration being given to the project.
This sheet is issued just before the legalization of the contract.
The term sheet covers all of the important aspects of the deal. Included are the financial options, control issues related to the Board of Directors, and valuation of the company.
What Does the Term “Valuation of the Company” Mean?
This is a critical number for both the entrepreneur and the venture financing company.
It is a dollar figure assigned to the worth of the company before the possible investment is about to take place.
This number plus the investment dollars drive the return on investment for the venture financing company.
You Can Do It
If you have a great idea that you know will resonate with customers and provide not only a quality service but an opportunity to generate revenue, it is important to sell your dream to others.
Some investors are looking for the next Uber or app-based or website-based company and are waiting to be sold on that idea.
You have the idea, and they have the financial resources to make one’s vision and dream become a reality.
Venture investing is an opportunity for investors to not only get a good return on their money but support innovation and the visions of the next entrepreneur.
Their contribution is not only in financially supporting a startup business and allowing them to run with their idea but also strengthen the economy of America.
This is accomplished by investing in a business that ultimately is the solid foundation of American capitalism.
Gaining support is only a personal interaction away with an individual that has the financial resources to make it happen.