With almost unlimited opportunities the advancement in technology is creating in the last 2 decades, many startups and small businesses today often seek for capital that could bring their dream business to success. While there's a wide variety of financial sources that they'll tap on, many of these 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 offered by venture capital firms to companies with high possibility of growth.
Venture capitalists are those investors who've the capability and interest to finance certain forms 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, may be the mediator between venture capitalists and capital seekers.
Because VCs are selective investors, venture capital isn't for several businesses. Just like the filing of bank loan or seeking a line of credit, you'll need showing proofs that your business has high possibility of growth, particularly during the initial four years of operation. VCs will request your business plan and they will scrutinize your financial projections. To qualify on the initial round of funding (or seed round), you've to ensure you've that business plan well-written and that your management team is fully ready for that business pitch.
Because VCs would be the more experienced entrepreneurs, they want to ensure that they'll improve Return on Investment (ROI) as well as a great amount in the company's equity. The mere proven fact that venture capitalism is just a high-risk-high-return investment, intelligent investing has always been the conventional type of trade. A proper negotiation between the fund seekers and the venture capital firm sets everything in their proper order. It starts with pre-money valuation of the organization seeking for capital. Following this, VC firm would then decide how much venture capital are they going to place in. Both parties should also acknowledge the share of equity each will probably receive. Typically, VCs get a percentage of equity which range from 10% to 50%.
The funding lifecycle typically 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 aid the company Luxury venture capital. VCs can harvest the returns on the investments typically after 3 years and eventually earn higher returns when the organization goes public in the 5th year onward. The odds of failing are usually there. But VC firms' strategy would be to invest on 5 to 10 high-growth potential companies. Economists call this strategy of VCs the "law of averages" where investors believe that large profits of a couple of may even out the tiny loses of many.
Any business seeking for capital must make sure 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 some 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. Besides 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 has become the driver of growth for a large number of startups and small businesses round the world.