Though the term venture capital financing seems fairly new, this process of funding business ventures has been around for a long time, and has been a valuable tool for small and large businesses alike.
What is it?
Whether it is to create a new business or make a current business grow, business owners looking for additional funding may turn to venture capitalists. Venture capital financing is a process where a venture capital firm, comprised of different investors, provides money to start-up firms or other businesses where there is the potential for expansion. Venture capitalists often hope to invest in companies right before there is explosive growth. This growth may be due to a new business product that cannot be brought to the marketplace unless there are additional production funds available. The injection of capital helps the business achieve its goals while ensuring the venture capital firm also profits.
How it Works
Small businesses may turn to venture capital financing when they find more traditional forms of financing are unavailable. Venture capital financing differs from a loan; the only way money is transferred back to the venture capital firm is if the business succeeds and can be sold to other investors at a profit, or if shares have grown substantially. If the business seems worthy of investment, the venture capital firm determines how they expect to receive the invested money and profit. When a venture capital firm invests, they have equity in your business; should it grow and generate revenue or be broken into pieces and sold once profitable, they will make money along with you.
Are there Risks?
The majority of risk in this type of transaction is with the venture capital firm. They are betting that the business will succeed. Through a variety of donors or members, they have a set amount of money they invest in other businesses and for businesses that fail, the firm loses their investment. That is not to say getting an investment is not without its risk. Should your business sign into an agreement with a venture capital firm, you are bound by the agreement you make. If your business becomes something different from what you thought, your options may be limited later. If the agreement was that you would sell once it is profitable, you may be forced to do so.
What Types of Businesses Use this Financing?
Some people are plagued with the notion that their company is too small to find investors; that is not always the case. Venture capital financing is more concerned with the profit margins. If your company is small, the amount they would be investing is likely to be small as well. If the investment monies can produce high return, however, it is considered to be a great risk. Many venture capital firms prefer to diversify their investments and small business owners can be a key way of minimizing the risks. Larger businesses also benefit from additional backers as it dilutes their risk and allows them to expand quickly while, hopefully, reaping the monetary benefits sooner.
Venture capital financing is a legitimate tool that can be used to help your business grow and succeed. Used for many years, this type of investing has helped float many businesses through difficult times and new transitions. When considering an investor, be sure to do your homework and come to an arrangement that suits both parties.