The world of venture capital for small and growing businesses is both exciting and daunting. While securing a ”heap of cash” to develop the business or product may realise many business owners’ visions and dreams, the challenge of managing the investment, people, investors, product development and growth has the potential to shatter those ideas in a matter of months. If you are contemplating using venture capital, you should find out as much as you can about it, what you need and who can help you before you start on the search for venture capital funding.
What is Venture Capital?
Venture capital is a method of financing fast-growing private companies that are involved in development and expansion. Usually, an investor provides equity finance such as cash, line of credit or debt facility to the company in exchange for an equity position in the business i.e. ownership of shares. Unlike a bank that requires regular payments and interest, the venture capital investment is made with the intent of receiving a return over a period of time (usually 3-5 years). It”s called ”patient capital”. The venture capitalist will realise their investment when the business is sold (trade sale) or publicly floats on a stock exchange (IPO).
Types of Venture Capitalists
1. Friends / family / your own mortgage – all can invest in your business. The business or idea is in concept phase and needs funds to get off the ground. Investment is usually between $50,000 and $500,0000. (Seed phase)
2. Business Angel – a high net worth individual who has management and business experience looking to invest in a fast moving business. They can contribute cash as well as time, alliances, introductions and mentoring. This is a high-risk investment phase and hence these investors seek high returns. Investment is usually between $100,000 and $1 million. (Start-up phase)
3. Business Angel Groups – a group of high net worth individuals or companies pooling resources and talent together to fund specific business types or industries. Investment is usually between $100,000 and $5 million. (Start-up and expansion stage)
4. Boutique Venture Capitalists – again, these firms specialise in industry sectors such as biotech, health, agriculture etc. They usually get involved with a business that has received initial funding by angels and has had time to prove the business concept. Investment is usually between $2 million and $10 million. (Expansion and development stage)
5. Institutional Venture Capital Firms – the ”big end of town”. Investing anywhere between $10 million and $100 million, they take businesses that have been growing rapidly, managing that growth well and are looking to list (IPO). They help the company float as well as develop further strategic alliances and expand the business.
How to Attract a Venture Capitalist
Venture capitalists determine the viability of a growing business by thoroughly reviewing it to determine if it is likely to be worth more in the future. This is called due diligence. They look at current business activities, revenue models, growth strategies, the management team in place, market potential and industry trends. Simply put, they review the business inside and out, as well as the marketplace space that the business is presently in.
The business owner will need to understand all of these issues and more to excite the interest of a venture capitalist. In order to do this, the business owner should write a PLAN. Yes, the dreaded four-letter word! A written plan, nicely bound and tied with a gold ribbon is not really the outcome a venture capitalist will be looking for. They will want to ”hear” and ”see” a business owner that has complete understanding of the space the business is in and where it”s going. The plan enables the owner to fully explore and accept the business opportunities, limitations, strengths and areas for improvement.
Steps to Acquiring Venture Capital
If you think your business will require venture capital there are a number of steps you can take:
1. Learn more about equity finance – venture capital and business angel investment.
2. If you don’t have a business plan, write one.
3. If writing a plan is a bit daunting, hire a coach, advisor or consultant to help you.
4. Talk with AVCAL (Australian Venture Capital Association), equity matching services and business brokers about the process, how they operate, the fees involved and time frames.
5. Take your time. Be informed about all of the issues before racing into an agreement. All venture capitalists and business angels are looking for ”the deal” of the century and you want to find the best opportunity, investor and finance solution for your business.
