The goal of venture capitalists is not to maximize all risks. Instead, they try to understand all risks in a business and weigh those risks with the return- the exit. Here are some risks that venture capitalists review:
Market timing risk
Venture capitalists ask themselves whether the business has been established at the right time. Although this risk is difficult to evaluate, it is an essential consideration. There are numerous stories of individuals saying they had the idea behind the Facebook establishment. But the market was not yet ready for it.
Business model risk
Before funding a start-up, venture capitalists must satisfy themselves that the start-up has a clear business model. The unit economics must seem to work. If not, there must be assumptions necessary to achieve profitability.
Market adoption risk
Venture capitalists look at the competition in the market. They are more likely to fund start-ups where there are no strong competitive players in the market. They also look at the barriers to entry.
To get funds from venture capitalists, a business must have a team with passion and right skill to reach their gold. If there are no skilled individuals, the team must be willing to find others to complement their skills.
Other risks that are evaluated by venture capitalists include technology risk, capitalization structure risk, platform risk, venture management risk, financial risk, and legal risk.
References http://tomtunguz.com/the-11-risks-vcs-evaluate/ http://www.investopedia.com/articles/financial-theory/11/how-venture-capitalists-make-investment-choices.asp
There is something exciting about entering a partnership with venture capitalists. For a start-up, partnering with a venture capital firm is a sign of success. Venture capital firms have capital that injects new lifeblood into the business growth of a start-up company.
Before entering into initial conversations with any of investment firm, a start-up company should thoroughly research all possible venture capital firms. When choosing the right venture capital firm, here are several things to keep in mind:
Consider the Strategy of your investment
First, ensure your company will derive benefits from a VC firm. Normally, venture capitalists bring major changes to the start-up. Terms of such partnership, for example, could warrant a 20 percent ownership in the company.
Go for established firms
Look for reputable capital venture firms that have already experienced success in a specific market. Although this will require you to do in-depth research, finding a venture capitalist that have a depth of industry knowledge will pay off in the end.
Look for perfect match
A good fit between a start-up and a VC firm is multi-faceted. It is all about getting an investor who has had success in your specific market and has relevant expertise.
References http://vennli.com/6-things-to-know-about-picking-the-right-venture-capital-firm/ https://bothsidesofthetable.com/what-i-would-look-for-when-choosing-a-vc-knowing-what-i-know-now-fbdc67689449
A business plan that is created to seek funds must demonstrate the prospects for profit. Entrepreneurs must show that their ideas will be profitable. They also need to show the amount of profit and when they will make enough profit to make the business worthwhile.
Any business plan should have the same basic elements. It should include product description and unique benefits it offers. The plan should also contain a marketplace overview that discusses the need in the marketplace for the product you or service you intend to sell, information about the competition, a description of the target customers, factors that will influence your customers, and projected marketplace trends in sales. Also, include your expertise for running the company, a budget, your market strategies, and financial projections.
If the capital is for a new business, any VC will need to see the business start-up costs. These are the costs that an entrepreneur need before he/she start selling. These costs include business set-up costs, deposits or payments for rent, research and development cost, costs to buy and outfit a building, and professional services fees.
If your business has been running for several years, venture capitalists will need to see operating costs. If you want to get expansion money, it is important to include operating costs for the last three years. This will allow investors to assess your ability to generate profit.
References http://smallbusiness.chron.com/role-business-plan-getting-venture-capital-funding-59646.html http://www.whiteboardmag.com/how-to-write-business-plan-vc-business-angels/
Those interested in venture capital are expected to familiarize themselves with some venture capital terms. These terms include:
Accredited investor– This is an investor with a special status under financial regulation laws
Angel investor– this is an officially recognized investor who use their finances to invest in a startup. Unlike large VCs, they work in small groups or even alone. They are mostly interested in the startup in the earliest stage.
Benchmark- this is the measure used to determine whether a start-up qualifies for more investment money. This is done by determining whether the startup has met its performance goals.
Cash position- this is the sum of the cash at hand and the assets referred to as highly liquid. (Short-term Debentures, CDs, among others)
General partner- this is a partner whose role is to oversee the day- to- day running of the VC firm. They are also referred to as managing partners.
Limited partner- Limited partners are those partners whose role is to invest their finances in the VC fund. They are not involved in the day-to-day running of the firm.
Merger- mergers occurs when two companies consolidate into one company for a given purpose, which may include obtaining a large market share, acquiring some given technology, among others.
ROI-Return on Investment- this is the ratio of some funds invested in a given project to the amount realized from the project (gain or loss)
Venture capital can be defined as a financial investment that is put into a risky project with the aim of earning a high rate of return. Venture capital firms offer risk capital to the entrepreneurs. They also take an active interest in guiding start-ups. Features of venture capital are:
High degrees of risk
As said earlier, venture capital represents a monetary investment in a highly risk venture with the aim of earning a high rate of return.
Invariably, venture capital financing is potential or actual equity participation. The venture capitalist’s objective is to make a profit by selling their shares once the start-up or company becomes profitable.
Long Term Investment:
Venture capitalists finance a project for a long period. It takes several years to encash the investment in securities made by VCs.
Participation in Management
Venture capitalists do not only provide capital but also take an active interest in managing the affairs of the assisted firm. Therefore, the approach of venture capital companies is different from that of traditional lenders (banks).
When entrepreneurs seek capital for their startup business, they have a number of options, among them venture capital funds. Corporate venture capital comes from large companies that have an interest in the innovation in the market. This is an option that entrepreneurs ought to give much weight.
Corporate VC can enable startups to access customers that are already established. This quickens its ability to find the market that best fits a business. Most companies that offer these funds usually already have a large customer base. The company can easily identify adopters of the new set of technology. This enables the startup to obtain the first batch of customers that can buy the startup’s products or services.
Once the startup gains market validation, it becomes easier to access revenue. This should be as an independent agreement form the investment agreement. This reduces the startup’s need for outside capital and enables the startup to be depicted as a sustainable business model.
Access to capital
This relieves the startup from searching for additional ways of raising funds. It becomes easier accessing other investors after the startup has obtained funding from one investor. The investor company can invest in the startup in as many rounds as it may desire.
Since the investor companies already have experience in a given field, it is easier to guide the startup on how best it can penetrate the market and grow into a big business. VC’s skills and experience makes the startup to stand out in the market.
In the business world, venture capital and seed capital are twin funds generating sources that individuals may need especially when they’re starting off their business ventures. Although both sources are similar in a few cases, they differ a lot in many cases.
Both venture capital and seed capital are avenues designed to raise money for smooth take-off of business ventures. Another similarity lays in the fact that angel investors are involved in both avenues. For instance, angel investors in the UK provide seed capital to people that need them. In the same vein, some UK angel investors are involved in venture capital.
Seed capital is the money you need to start your business. The money could come from your friends, family members and other external individuals. In some countries, these external individuals are referred to as angel investors. Simply speaking, seed capital is the fund a person needs to get his/her business off the ground. On the other hand, venture capital is the fund required to start a bigger business. The target is primarily for individuals who want to build big companies or firms. The venture capital is mainly offered in real cash in exchange for the company’s share.
The difference between seed capital and venture capital also lies in the sources of the fund involved. In the seed capital investments, most angel investors invest their own personal money. When it comes to venture capital, money invested is not directly from investors’ pockets. They get the funds from the pool of professionally managed funds that belong to others.