When you seek venture capital, depending on the size of the round and the appetite for risk of the investor, you may end up with an investment group rather than a single VC.
During the course of your talks with various VC firms, ask if they would consider being part of an investor group. The conversation that follows will give you a variety of information. They will probably tell you if they always, sometimes or never co-invest with other groups. If they do, ask them who else they normally invest with. If they are interested enough to have you in for a presentation, they may be willing to make an introduction to another firm.
Also, let's say you get a 'no' from the VC you are talking to, but you get the feeling it's a soft no. If you find another company that is willing to lead your round of financing, you may come back to firms that normally co-invest with others, even if they have already turned you down. Upon occasion, once an investment is blessed by another firm, the first firm may reconsider their position.
The VC should have let you know ahead of time that his firm is interested in being part of an investor group. Finding out on the term sheet that the firm only intends to invest in part of the round indicates either that the VC is a rookie or that there were some last minute qualms about the investment that caused the partners to back-peddle at the last minute.
A rookie VC may or may not be a bad thing, but if one or more of the partners is skiddish about the deal, there could be trouble through the term-sheet negotiations. Try to pinpoint what is making the partners take a lower risk position, so you can reassure them.
In general, having several well-known firms as part of your investor group is a positive. For one, you get twice the resources for the same investment, including twice the industry and future investment contacts. Additionally, if you need a second round, the investors may not be able to continue investing, but if you have two firms, your chances of receiving additional investment double.
Thursday, May 8, 2008
Chance For Venture Capitals
IT, including computer, software, internet, dot com boom etc, has made hundreds of millionaires in Silicon Valley over night since 1980s. Till now, this fairy tale still continues, but the source is drying up. Although, venture capitalists are trying digging in biologics, nano science etc, but they have to confess: it is really hard to find a real chance, which will be successful like the Apple, Microsoft, Yahoo, Ebay, Google, and Youtube again.
So, where is the next chance for Venture Capitals?
Let's see how a Venture Capitalist picking a project firstly.
Venture capital is one kind of private equity capital typically provided by professional, outside investors to new, growth businesses. A venture capitalist (VC) is a person who makes such investments.
When a new company is built up, it always needs money to grow. For many companies (especially for those new companies based on high-technology), seeking venture capital firms is always the first option. The founders of the company generally will write a business plan that shows what they will do and what they think will happen to the company in the future (such as how fast it will grow, how much money it will make, etc.). The VCs read the plan, and if they like what they see, they will consider investing money in the company. The first round of money is called a seed round. And the VC who invests seed capital is so-called "Angel". Normally, a company will receive 3 or 4 rounds of funding typically, before it is going public or getting acquired.
The NASDAQ crash and technology slump that started in March 2000 shook some VC funds significantly by the resulting disastrous losses from overvalued and non-performing startups. Since 2005, the revival of a dot com-driven environment has helped to revive the VC environment. Today, the VC environment is still hot, but bubble is bigger and bigger in dot com boom. For seeking new profitable and safe investing target, VCs start to withdraw from dot com boom and focus at a new industry: FOREX Automated Trading Software.
FOREX - The Foreign currency Exchange market is by far the largest financial market in the world. The average daily trade in the global FOREX markets exceeds US$1.9 trillion (Source: the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2004, and published in March 2005). For comparison, the biggest stock market on the Earth - NYSE Group (The New York Stock Exchange), has a daily trading volume of approximately $86.8 billion (Source: NYSE Group, Inc. 2006). FOREX has a 18.4% average growth rate per year since 1989. It offers trading 24 hours a day, five days a week, non-stop over Internet.
But, in this huge market, as the story goes, at least 90% of new FOREX traders lose all their money within their first 3 months of trading. Why? Most losing traders who inquire about FOREX trading are quite intelligent, they just lack the right tools, the "Secret Weapons" to win. They are not beaten by other traders, they simply are beaten by themselves, by humans' weaknesses.
To overcome these terrible weaknesses of humans, people have developed many methods. One of them is called "Automated Trading". Automated (or Automatic) Forex Trading means to trade Forex (Foreign Currencies) using some trading systems, programs, software or robots (on Metatrader MT4 platform it is called as Expert Advisors - EA), without needing a human to physically trade. An automated trading system is a group of specific rules and parameters, governing entry and exit points, having the ability to both generate signals and execute trades automatically. An EA is an automated trading "robot". Robots can beat human beings' world champion at chess games, likewise, EA robots can triumph over human traders at FOREX trading.
The practical experience shows that a high quality automated trading system always guaranties some kind of financial success for its owner working on Forex market. The latest fact is: in the Automated Trading Championship 2007, a world competition, all participants use EA robots, the champion won 1204.75% profit, the runner-up won 450.42%, and the third place won 299.45%, just within 12 weeks.
Isn't that amazing?
For Venture Capital firms, FOREX Automated Trading Software is still an undeveloped gold mine. Look at these:
# 1. It combines Software, Internet Technology, and Finance together. There are three "golden elements" in one project. This concept is rare.
# 2. In dot com boom, many VCs just burn money and get nothing but meaningless so-called "eyeball rate". FOREX Automated Trading Software industry is quite different. It makes money by itself!
# 3. Many venture projects are just a kind of "concept" or "idea", no real products at all. Company founders just try to sell this empty "idea" to VCs, and VCs try to sell this story to stock buyers in stock market. But FOREX Automated Trading Software industry is real and ripe. VCs even can confirm these software's results, records and performances in real time, for example, via RSS Feed, before they decide to put money in the company.
Who can invest in this area first, who will be the king of VC in next decade.
So, where is the next chance for Venture Capitals?
Let's see how a Venture Capitalist picking a project firstly.
Venture capital is one kind of private equity capital typically provided by professional, outside investors to new, growth businesses. A venture capitalist (VC) is a person who makes such investments.
When a new company is built up, it always needs money to grow. For many companies (especially for those new companies based on high-technology), seeking venture capital firms is always the first option. The founders of the company generally will write a business plan that shows what they will do and what they think will happen to the company in the future (such as how fast it will grow, how much money it will make, etc.). The VCs read the plan, and if they like what they see, they will consider investing money in the company. The first round of money is called a seed round. And the VC who invests seed capital is so-called "Angel". Normally, a company will receive 3 or 4 rounds of funding typically, before it is going public or getting acquired.
The NASDAQ crash and technology slump that started in March 2000 shook some VC funds significantly by the resulting disastrous losses from overvalued and non-performing startups. Since 2005, the revival of a dot com-driven environment has helped to revive the VC environment. Today, the VC environment is still hot, but bubble is bigger and bigger in dot com boom. For seeking new profitable and safe investing target, VCs start to withdraw from dot com boom and focus at a new industry: FOREX Automated Trading Software.
FOREX - The Foreign currency Exchange market is by far the largest financial market in the world. The average daily trade in the global FOREX markets exceeds US$1.9 trillion (Source: the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2004, and published in March 2005). For comparison, the biggest stock market on the Earth - NYSE Group (The New York Stock Exchange), has a daily trading volume of approximately $86.8 billion (Source: NYSE Group, Inc. 2006). FOREX has a 18.4% average growth rate per year since 1989. It offers trading 24 hours a day, five days a week, non-stop over Internet.
But, in this huge market, as the story goes, at least 90% of new FOREX traders lose all their money within their first 3 months of trading. Why? Most losing traders who inquire about FOREX trading are quite intelligent, they just lack the right tools, the "Secret Weapons" to win. They are not beaten by other traders, they simply are beaten by themselves, by humans' weaknesses.
To overcome these terrible weaknesses of humans, people have developed many methods. One of them is called "Automated Trading". Automated (or Automatic) Forex Trading means to trade Forex (Foreign Currencies) using some trading systems, programs, software or robots (on Metatrader MT4 platform it is called as Expert Advisors - EA), without needing a human to physically trade. An automated trading system is a group of specific rules and parameters, governing entry and exit points, having the ability to both generate signals and execute trades automatically. An EA is an automated trading "robot". Robots can beat human beings' world champion at chess games, likewise, EA robots can triumph over human traders at FOREX trading.
The practical experience shows that a high quality automated trading system always guaranties some kind of financial success for its owner working on Forex market. The latest fact is: in the Automated Trading Championship 2007, a world competition, all participants use EA robots, the champion won 1204.75% profit, the runner-up won 450.42%, and the third place won 299.45%, just within 12 weeks.
Isn't that amazing?
For Venture Capital firms, FOREX Automated Trading Software is still an undeveloped gold mine. Look at these:
# 1. It combines Software, Internet Technology, and Finance together. There are three "golden elements" in one project. This concept is rare.
# 2. In dot com boom, many VCs just burn money and get nothing but meaningless so-called "eyeball rate". FOREX Automated Trading Software industry is quite different. It makes money by itself!
# 3. Many venture projects are just a kind of "concept" or "idea", no real products at all. Company founders just try to sell this empty "idea" to VCs, and VCs try to sell this story to stock buyers in stock market. But FOREX Automated Trading Software industry is real and ripe. VCs even can confirm these software's results, records and performances in real time, for example, via RSS Feed, before they decide to put money in the company.
Who can invest in this area first, who will be the king of VC in next decade.
Tuesday, April 1, 2008
Investing in Venture Capital
When investing in venture capital, always keep one thing in perspective. All investments have equal risk, and the average cost of capital for the firm can be used for evaluating investment proposals. Investment proposals differ in risk. An investment proposal to manufacture a new product, for example, is likely to be more risky than one involving replacement of an existing plant. In view of such differences, variations in risk need to be considered in venture capital investment appraisal.
In many cases, the revenues expected from a project are conservatively estimated to ensure that the viability of the proposed project is not easily threatened by unfavorable circumstances. The capital budgeting systems often have built-in devices for conservative estimation.
A margin of safety in venture capital investing is generally included in estimating cost figures. This varies between 10 and 30 per cent of what is deemed as normal cost. The size of the margin depends on how management feels about the likely variation in cost. The cut- off point on an investment varies according to the judgment of management on how risky the project might be. In one company, replacement investments are okayed if the expected post-tax return exceeds 15 per cent but new investments are undertaken only if the expected post-tax return is greater than 20 per cent. Another company employs a short payback period of three years for new investments. Its finance controller stated this rule as follows:
“Our policy is to accept a new project only if it has a payback period of three years. We have never, as far as I know, deviated from this. The use of a short payback period automatically weeds out risky projects.” Some companies calculate what may be called the overall certainty index, based on a few crucial factors affecting the success of the project.
In many cases, the revenues expected from a project are conservatively estimated to ensure that the viability of the proposed project is not easily threatened by unfavorable circumstances. The capital budgeting systems often have built-in devices for conservative estimation.
A margin of safety in venture capital investing is generally included in estimating cost figures. This varies between 10 and 30 per cent of what is deemed as normal cost. The size of the margin depends on how management feels about the likely variation in cost. The cut- off point on an investment varies according to the judgment of management on how risky the project might be. In one company, replacement investments are okayed if the expected post-tax return exceeds 15 per cent but new investments are undertaken only if the expected post-tax return is greater than 20 per cent. Another company employs a short payback period of three years for new investments. Its finance controller stated this rule as follows:
“Our policy is to accept a new project only if it has a payback period of three years. We have never, as far as I know, deviated from this. The use of a short payback period automatically weeds out risky projects.” Some companies calculate what may be called the overall certainty index, based on a few crucial factors affecting the success of the project.
Critical Business Capital Source
What is venture capital and how does it differ from other forms of equity procurement? The answer lies in an understanding of the relationship of risk and return in investing.
One of the key principles of investment is that the greater the risk, the greater the potential for high rate of return. This might be called the "no guts, no glory" theory. If you are looking for a very safe and secure investment, there are plenty to be found, but you can be reasonably sure that your rate of return will be low. These low return, but safe investments are designed for long term investment. Even a small rate of return will have some accumulated value far into the future. If you are looking to really make money on your investment, you must be willing to take risks. What is venture capital? It is capital that is invested in high risk, but potentially high return ventures.
Venture capital is considered a private equity source. This means that it is not made available by normal lending institutions such as banks. Rather it is equity, most often in the form of cash, that is made available to finance the start up of companies that have an innovative idea, but lack the capital and do not qualify for debt type of financing. In most cases, the venture capital is exchanged for an ownership interest in the new company. This is most commonly in the form of stock ownership.
The disadvantages of using venture capital as opposed to normal debt financing for start up costs include the fact that some ownership rights are given up and the cost of repayment is very high. The advantage of venture capital is that it is often the only way to launch the business. It is pretty much a safe assumption that if the people starting the high risk business were able to secure financing through normal channels at lower cost and without surrendering any ownership control, they would do so.
This explains why venture capital is used so often in companies introducing new technology. Software companies and the now infamous "dot com" companies were good examples of firms that sought venture capital. Their main assets were ideas rather than tangible and solid items that were more likely to act as collateral in the eyes of a banker. Yet, it is in emerging technology that the opportunities for tremendous profit lie and this is what attracts the private investor to venture capital.
In some cases, groups of individuals join together to create venture capital funds. The idea remains the same. The venture capital fund acts only as an entity to handle the investments of the group. Some venture capital funds make investments on behalf of third party investors, but the definition of venture capital remains unchanged. Venture capital is not restricted to start up either. In some cases, it is used for research projects or expansion of an existing company. Once again, these alternative uses do not alter the basic definition of venture capital. It is a private source of funding for high risk companies offering potentially large returns if successful.
One of the key principles of investment is that the greater the risk, the greater the potential for high rate of return. This might be called the "no guts, no glory" theory. If you are looking for a very safe and secure investment, there are plenty to be found, but you can be reasonably sure that your rate of return will be low. These low return, but safe investments are designed for long term investment. Even a small rate of return will have some accumulated value far into the future. If you are looking to really make money on your investment, you must be willing to take risks. What is venture capital? It is capital that is invested in high risk, but potentially high return ventures.
Venture capital is considered a private equity source. This means that it is not made available by normal lending institutions such as banks. Rather it is equity, most often in the form of cash, that is made available to finance the start up of companies that have an innovative idea, but lack the capital and do not qualify for debt type of financing. In most cases, the venture capital is exchanged for an ownership interest in the new company. This is most commonly in the form of stock ownership.
The disadvantages of using venture capital as opposed to normal debt financing for start up costs include the fact that some ownership rights are given up and the cost of repayment is very high. The advantage of venture capital is that it is often the only way to launch the business. It is pretty much a safe assumption that if the people starting the high risk business were able to secure financing through normal channels at lower cost and without surrendering any ownership control, they would do so.
This explains why venture capital is used so often in companies introducing new technology. Software companies and the now infamous "dot com" companies were good examples of firms that sought venture capital. Their main assets were ideas rather than tangible and solid items that were more likely to act as collateral in the eyes of a banker. Yet, it is in emerging technology that the opportunities for tremendous profit lie and this is what attracts the private investor to venture capital.
In some cases, groups of individuals join together to create venture capital funds. The idea remains the same. The venture capital fund acts only as an entity to handle the investments of the group. Some venture capital funds make investments on behalf of third party investors, but the definition of venture capital remains unchanged. Venture capital is not restricted to start up either. In some cases, it is used for research projects or expansion of an existing company. Once again, these alternative uses do not alter the basic definition of venture capital. It is a private source of funding for high risk companies offering potentially large returns if successful.
Monday, March 17, 2008
High Returns Corporate Venture Capitals Financing
High growth incorporation tends to choose venture capital funding to hasten the next growth phase. Venture capitalists who focus on the company's growth pattern don't require the pledging of assets as required by lenders like banks.
Venture capital financing is an option for corporations with a unique corporate proposition that may earn high returns on investment of at least 30% a year. These corporations require large outlays of capital. Venture capitalists normally take an ownership stake, to share in the corporation's business risk and profits. Therefore, it may become one of its institutional shareholders. In return, the corporation will benefit from the financial and operational support provided by the venture capitalist's management team.
An important consideration for the corporation is to obtain enough capital to capture market share quickly and additional funds raised through a venture capitalist can give the corporation sufficient working capital to market, brand and sell the company's products.
Having an institutional shareholder or venture capitalist in a corporation, gives confidence to your customers, as the shareholder would have done due diligence on the corporation and there is a brand associated with it.
Having a venture capitalist on board also means that corporate governance is part of the company's policy from the start. However, a drawback of venture capital financing is that a corporation may feel a lack of control as the venture capitalist has stringent covenants like not allowing the corporation to change its business direction without prior approval.
Some corporations can't understand the difference between lending and investing, as defined by the venture capitalists; they invest based on the risk and value of the company and when it's mature for exit, they get a higher value. So, it is not about lending in the conventional banking sense. When a corporate man approaches a bank, he usually asks how much the interest is, the interest payments and what the principal is.
A corporation may also fear that the venture capitalist may pull out by selling or diluting its stake, if the corporation doesn't perform well. This is one of the reasons a corporation resort to bank borrowings instead.
A corporation should view venture capitalists as committed to invest in the company's growth, thus creating value for themselves while providing strategic guidance, business network contacts and sales referrals.
It is advisable that corporations to be prepared to give up the controlling stake; an issue that many corporations are uncomfortable with. However, rather than focusing on losing control, a corporation should consider the benefits derived. When the venture capitalists invest in a business, there is a certain standard or value placed on the company.
A corporation needs to decide if the benefits of venture capital funding outweigh the disadvantages and how important retaining ownership is in the entire equation.
When selecting the corporation in which to invest, venture capitalists tend to look at four criteria, which are people, technology, capital and market. A venture capitalist also usually selects a growing corporation with a bottom line or profit after tax is growing by at least 25% annually.
Venture capital financing is an option for corporations with a unique corporate proposition that may earn high returns on investment of at least 30% a year. These corporations require large outlays of capital. Venture capitalists normally take an ownership stake, to share in the corporation's business risk and profits. Therefore, it may become one of its institutional shareholders. In return, the corporation will benefit from the financial and operational support provided by the venture capitalist's management team.
An important consideration for the corporation is to obtain enough capital to capture market share quickly and additional funds raised through a venture capitalist can give the corporation sufficient working capital to market, brand and sell the company's products.
Having an institutional shareholder or venture capitalist in a corporation, gives confidence to your customers, as the shareholder would have done due diligence on the corporation and there is a brand associated with it.
Having a venture capitalist on board also means that corporate governance is part of the company's policy from the start. However, a drawback of venture capital financing is that a corporation may feel a lack of control as the venture capitalist has stringent covenants like not allowing the corporation to change its business direction without prior approval.
Some corporations can't understand the difference between lending and investing, as defined by the venture capitalists; they invest based on the risk and value of the company and when it's mature for exit, they get a higher value. So, it is not about lending in the conventional banking sense. When a corporate man approaches a bank, he usually asks how much the interest is, the interest payments and what the principal is.
A corporation may also fear that the venture capitalist may pull out by selling or diluting its stake, if the corporation doesn't perform well. This is one of the reasons a corporation resort to bank borrowings instead.
A corporation should view venture capitalists as committed to invest in the company's growth, thus creating value for themselves while providing strategic guidance, business network contacts and sales referrals.
It is advisable that corporations to be prepared to give up the controlling stake; an issue that many corporations are uncomfortable with. However, rather than focusing on losing control, a corporation should consider the benefits derived. When the venture capitalists invest in a business, there is a certain standard or value placed on the company.
A corporation needs to decide if the benefits of venture capital funding outweigh the disadvantages and how important retaining ownership is in the entire equation.
When selecting the corporation in which to invest, venture capitalists tend to look at four criteria, which are people, technology, capital and market. A venture capitalist also usually selects a growing corporation with a bottom line or profit after tax is growing by at least 25% annually.
Financing And Funding In Venture Capital
Accessing capital through venture capital funding has become almost an art form. There are small players that finance up to $500,000 and larger players that finance up to $25,000,000 or more. There are industry specific firms and there are firms that focus on a specific region, country or continent.
Although you want to contact as many potential investors as possible, it is good practice to do your research and preparation first, then contact numerous potential investors. No sense sending your business plan or executive summary to firms that only fund $5,000,000 or more if you are only looking to raise $1,000,000. Likewise, it doesn't make sense to send an executive summary and then spend hours or valuable time making follow-up calls to venture capital firms that only fund technology or biotech companies if your company is in the retail business.
Over the years, the terms "venture capital" and "private equity" have become blurred and intertwined. My suspicion is that venture capitalists got tagged with the nickname "vulture capitalists" and decided to start using the less offensive name, "private equity investor". After all, who would you rather get funded by a vulture capital firm or a private equity firm.
I think an easier distinction, however, is that venture capital more often relates to funding provided to start-up companies or very young companies, whereas private equity refers more to funding provided to more established companies or companies in a growth stage or seeking mergers and acquisitions.
Venture capital funding, when applied to these start-up or young companies is therefore very costly since the company likely has very little revenue if any and probably needs the financing to survive. If that is the situation, of course the investor is going to dictate some very demanding terms and require a large piece of equity in your company because of the high risks involved. Looking at the situation from another point of view, if your company is in no position to bargain and survival depends on that financing, then you would be foolish not to take the financing. Management should try to avoid the situation by raising capital well in advance of when it will be needed. Keep in mind that when it comes to raising funding for a company it usually take much longer to raise than anticipated.
There are some things you can do to allow your management team to recapture some of its equity, such as a claw back. This allows you to buy back a small portion of the equity they investor purchased if management is able to hit certain milestones in terms of gross or net revenues.
Although you want to contact as many potential investors as possible, it is good practice to do your research and preparation first, then contact numerous potential investors. No sense sending your business plan or executive summary to firms that only fund $5,000,000 or more if you are only looking to raise $1,000,000. Likewise, it doesn't make sense to send an executive summary and then spend hours or valuable time making follow-up calls to venture capital firms that only fund technology or biotech companies if your company is in the retail business.
Over the years, the terms "venture capital" and "private equity" have become blurred and intertwined. My suspicion is that venture capitalists got tagged with the nickname "vulture capitalists" and decided to start using the less offensive name, "private equity investor". After all, who would you rather get funded by a vulture capital firm or a private equity firm.
I think an easier distinction, however, is that venture capital more often relates to funding provided to start-up companies or very young companies, whereas private equity refers more to funding provided to more established companies or companies in a growth stage or seeking mergers and acquisitions.
Venture capital funding, when applied to these start-up or young companies is therefore very costly since the company likely has very little revenue if any and probably needs the financing to survive. If that is the situation, of course the investor is going to dictate some very demanding terms and require a large piece of equity in your company because of the high risks involved. Looking at the situation from another point of view, if your company is in no position to bargain and survival depends on that financing, then you would be foolish not to take the financing. Management should try to avoid the situation by raising capital well in advance of when it will be needed. Keep in mind that when it comes to raising funding for a company it usually take much longer to raise than anticipated.
There are some things you can do to allow your management team to recapture some of its equity, such as a claw back. This allows you to buy back a small portion of the equity they investor purchased if management is able to hit certain milestones in terms of gross or net revenues.
Tuesday, February 26, 2008
Small Business Venture Capital Funds
Capital budgeting is very important in small business venture capital. It is the process of making investment in capital expenditure. Capital expenditure refers to expenditure and the benefits that are expected over a period of time, especially exceeding one year. The chief characteristic of capital expenditure is that expenses are incurred aggressively at one point in time. The benefits are realized at different points in time in the future. Capital expenditure decisions are also called long-term investment decisions.
Capital budgeting is very important in small business venture capital. It is the process of making investment in capital expenditure. Capital expenditure refers to expenditure and the benefits that are expected over a period of time, especially exceeding one year. The chief characteristic of capital expenditure is that expenses are incurred aggressively at one point in time. The benefits are realized at different points in time in the future. Capital expenditure decisions are also called long-term investment decisions.
The decisions concerning capital budgeting are crucial because they are long-term oriented and are irreversible in nature. The efficient running of a firm is reflected by the way decisions are made for the effective utilization of the firm’s financial resources. Such capital budgeting decisions are considered to be of paramount importance in heavy investment, long-term commitment of funds and impact on profitability.
The capital budgeting decisions generally involve very large amounts of capital funds. However, the availability of such funds is very limited. It is essential that thoughtful and wise decisions be made concerning investment of capital funds. This would, result in flow of profits for the firm. Capital budgeting involves employment of capital funds in the activities of the firm on a long-term basis. This increases the financial risk involved in such investment decisions, and necessitates careful and efficient planning. This is because, any wrong and unwise decision may prove disastrous for the small business venture capital firm.
Enterpreneurship With The Risks Of Venture Capitals
One of the leading career choices of college seniors in the past and still is today, to become an entrepreneur. Surveys continue to show that one out of three working Americans want to be their own boss. What’s stopping them? Lack of capital. Capital is the fuel that energizes the business.
Money is not difficult to find. Available cash always exists in great abundance, but you’ve got to know where to look for it and the proper way to get it. Most start-up entrepreneurs look to family, friends, or banks to get money for their businesses, but one the best yet often overlooked sources of working capital is venture capitalists.
Venture capitalists are essentially risk-takers, whose strategy is to grow their assets through judicious investment in promising new enterprises. Such firms have the ability to offer attractive alternatives to traditional lending sources such as banks, whose conditions for repayment may prove exceedingly burdensome for start-up businesses.
A venture capitalist firm is interested in future returns on investments and will invest heavily in a promising new company, even though short-term profits may be less than stellar. The risk inherent in such future-oriented investment is countered by financial expectations that may far exceed those of more traditional or conservative investments.
In some cases, the returns may prove life-changing, not only in personal fortune, but in the impact on society as a whole. A good example of this point is the story of Apple Computer. It took only a few thousand dollars for Steve Jobs and Steve Wozniak and their friends in the Homebrew Computer Club to produce their first several dozen personal computers.
It wasn’t until they received the backing from such individuals as Mike Markkula, an engineering and marketing expert who invested $250,000 and venture capitalist Arthur Rock who invested 1.5 million that Apple was able to embark on its historic journey to success. Once the company established an early track record of success it attracted even more money, such as the 7.2 million invested by the L.R. Rothschild Company.
Unlike family and friends venture capitalists won’t invest in a business simply because they like the people involved, but because they have confidence in the product and the management team’s skills, strategy, and experience. Still the right mix of personal chemistry is obviously an important part of that confidence, even in the most businesslike of relations.
An important rule to remember when you’re looking for financial capital is that it’s far more important whose money you get than how much you get or how much you pay for it. The right backers can indeed make all the difference, because experienced investors are often able to provide strategic insight and industry-specific savvy as they mentor their partners toward entrepreneurial success.
Most aspiring entrepreneurs who need working capital to start their business raise money through family, friends, or personal connections. For small family businesses or sole proprietorships, this is the common route toward covering initial start-up costs. However, it is important to always remember that loans motivated more by personal loyalty than confidence in the business plan can often turn a good relationship into a conflict and possibly ruin it altogether.
Family and close associates can often be the worst sources of investment capital, especially when a new business is not performing as well as planned. Relationships can be strained, even to the breaking point. Demands are often made that suddenly turn your lifetime dream of building a business and your friendships into a nightmare.
It is true that many businesses would never get off the ground without the support of family and friends, but you need to proceed cautiously and make sure that your family or friends who invest in the business are fully aware of the inherent risks.
Before you start a business you must prepare a detailed business plan. There is no standard format for a business plan, but if you’re going to use it to obtain financing it must be professional and persuasive.
One of the most common reasons why businesses fail is because the owner did not develop or follow a business plan. For a business to be successful the owner must update the business plan yearly with new monthly goals. A good business plan not only serves a valuable monitoring tool for all areas of the business, but is a must for any potential investors.
Here is a brief overview of what a business plan and financing proposal should include:
• Products, services, and goals.
• Legal structure and ownership.
• Marketing and sales strategy.
• Equipment, facilities, technology, and assets.
• Management and employee resources.
• Projected financial statements for a proscribed period.
• The purpose of the loan.
Your business plan and financing proposal needs to have a brief 3 to 5 page summary of your situation and needs. This summary will provide potential investors with quick overview and can be sent as part of an initial query.
Keep the entire business plan and financing proposal brief, no more than 50 pages. Make sure it is easy to read, realistic, factual, and contains the information that is required by any potential investor.
When you’re trying to get working capital from potential investors you should always be prepared for rejection. When it happens, don’t take it personally. Lenders and investors have their own agendas. To be successful you must be willing to persevere, because there are three common characteristics that all successful entrepreneurs have; they all have persistence, they all have a willingness to do what others won’t, and they all have a desire for financial independence.
Writer and speaker, Earl Nightingale said, “Success is the progressive realization of a worth ideal.” In business worthy ideals are ultimately about introducing practical ways to live better. With the Internet and the technological explosion of the 21st century the promise and possibility of tomorrow is bound only by the limits of human imagination and courage.
The future will certainly belong to those who best embrace this phrase by Goethe, “Whatever you dream you can, begin it, boldness has genius, power, and magic in it.”
Copyright©2006 by Joe Love and JLM & Associates, Inc. All rights reserved worldwide.
Joe Love draws on his 25 years of experience helping both individuals and companies build their businesses, increase profits, and achieve total success. He is the founder and CEO of JLM & Associates, a consulting and training organization, specializing in personal and business development. Through his seminars and lectures, Joe Love addresses thousands of men and women each year, including the executives and staffs of many businesses around the world, on the subjects of leadership, achievement, goals, strategic business planning, and marketing.
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