Venture Capital Basics
In a venture capital deal, large ownership chunks of a company are created and sold to a few investors through independent limited partnerships that are established by venture capital firms. Sometimes these partnerships consist of a pool of several similar enterprises. One important difference between venture capital and other private equity deals, however, is that venture capital tends to focus on emerging companies seeking substantial funds for the first time, while private equity tends to fund larger, more established companies that are seeking an equity infusion or a chance for company founders to transfer some of their ownership stakes. (investopedia.com)
For small businesses, or for up-and-coming businesses in emerging industries, venture capital is generally provided by high net worth individuals (HNWIs ) – also often known as ‘ angel investors ' – and venture capital firms. The National Venture Capital Association (NVCA) is an organization composed of hundreds of venture capital firms that offer to fund innovative enterprises. Angel investors are typically a diverse group of individuals who have amassed their wealth through a variety of sources. However, they tend to be entrepreneurs themselves, or executives recently retired from the business empires they've built. (investopedia.com)
They can be an ideal partner to learn from when
• wanting to educate their startup self about decisions involving money and risks
• wants to know what investors are looking for• wants to see structures that would allow them to compete for venture capital with larger players.
Before entering into a venture, the most important thing startups can do is make sure they are prepared for all the following characteristics of their business:
• contemplated strategies for their company.
• estimates of cash needed for operations, collateral, working capital, and growth, and long-term goals.
• Didn’t anticipate how they office, market, and product lines might fit into their strategic plans and how to get the necessary quotient.
• timelines and goals regarding key management, product, and distribution strategies.These include infrastructure needs (equipment, office space, infrastructure, personnel, etc.), goals, milestones, and exit strategies.
A Startup Fundraising Strategy
Investors want to know what they are investing into and many will ask you, "What’s my investment product?" or, "What’s my exit strategy?" If you're just starting out, you want to stay as relevant as possible so you can address every issue possible in your industry; whether it's new products or better distribution or marketing, everything starts with your product or market. Ideally, you want to be in a growth industry, but one that is not overextended. By staying relevant, you keep investors interested in their portfolios. Diligence goes hand in hand with product and strategy.
Since most startups know little at this stage of development, many will attempt to invest independently without considering the investor. Proper due diligence is critical when attempting to protect investor money. Before investing, consult your financial professional such as your tax and legal advisors. If you decide to invest with a partner, make sure they are financially stable and have significant experience and expertise. Investors are looking for an investment opportunity that has longer-term potential (over one year), a high probability of success, and a clear exit strategy.
Investors often consider investing in a startup with a large equity investor such as a relative or friend. However, it’s smart to invest in an industry that you have a stake in already or will be in the future. An example of this would be to invest in a software company, or computer manufacturers.
The early stage of the investor and entrepreneur relationship is investing on your own and testing out the market and your product for yourself. What you need is adequate capital to consolidate your business and help you sharpen your competitive advantages. So, if you are just starting out you want to do your due diligence, research and identify markets - generally means dabbling in a specific industry, whether it’s a new market movement, new product, new service, or something else. Thus, the initial process of becoming an expert in a specific industry will include taking time to work on your own and test driving the market, products and services, or a combination of all of the above.Identifying how you can grow your company, add value to your industry, and engage your customers in marketing through effective distribution and marketing, will rule your investment strategy. Choosing the right industry to invest in, with perfect niche, product, and distribution channels will determine the success of your business and market location.
The myth is that venture capitalists invest in good people and good ideas. The reality is that they invest in good industries. Timing Is Everything More than 80% of the money invested by venture capitalists goes into the adolescent phase of a company's life cycle. In this period of accelerated growth, the financials of both the eventual winners and losers look strikingly similar. Picking the wrong industry or betting on a technology risk in an unproven market segment is something VCs avoid. Exceptions to this rule tend to involve “concept” stocks, those that hold great promise but that take an extremely long time to succeed. Genetic engineering companies illustrate this point. In that industry, the venture capitalist's challenge is to identify entrepreneurs who can advance a key technology to a certain stage FDA approval, for example at which point the company can be taken public or sold to a major corporation. (hbr.org)
Use Crowdfunding to Fund your Startup
Crowdfunding raises funds for a startup from a large number of people, called crowdfunders. Crowdfunders aren't technically investors, because they don't receive a share of ownership in the business and don't expect a financial return on their money. Instead, crowdfunders expect to get a “gift” from your company as thanks for their contribution. Often, that gift is the product you plan to sell or other special perks, like meeting the business owner or getting their name in the credits. This makes crowdfunding a popular option for people who want to produce creative works (like a documentary), or a physical product (like a high-tech cooler). Crowdfunding is also popular because it's very low risk for business owners. Not only do you get to retain full control of your company, but if your plan fails, you're typically under no obligation to repay your crowdfunders. Every crowdfunding platform is different, so make sure to read the fine print and understand your full financial and legal obligations. (sba.gov)
Before entering into an investor or startup agreement, make sure to do your homework. Be sure you have a clear picture of what you need to do to succeed and of the resources you will require to build and run your venture. Ask for the proper level of financial support, otherwise risks may be raised.