Business Opportunity Seekers : Venture Capitalist
Venture capital (also known as VC or Venture) is a type of capital investment that is generally made as cash in exchange for shares in the invested company.
Venture capitalists (VC) are business opportunity seekers or investment firms that make venture investments with the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. VCs are expected to bring managerial and technical expertise as well as capital to their investments.VC firms typically comprise of small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience.
VC is usually provided for early-stage, high-potential growth companies. Venture capital investors typically identify and back novel technologies that have the potential to generate high commercial returns at an early stage.
Venture capital typically comes from two sources and is known as a pooled investment.
- 1. Institutional investors which include banks, insurance companies, retirement or pension funds, hedge funds, and mutual funds.
- 2. High net worth individuals (HNWI) which are people with a high net worth and are typically defined as having financial assets (not including primary residence) in excess of US$1 million.
Why seek venture capital?
Venture capital is most suitable for new companies that have:
- A limited operating history and are too small to raise capital in the public market;
- Not reached the point where they are able to secure a bank loan or complete a debt offering; and
- Large up-front capital requirements which cannot be financed by cheaper alternatives such as debt.
The need for high returns makes venture funding an expensive capital source for companies. Therefore, many start-ups seek to self-finance until they reach a point where they can credibly approach business opportunity seekers such as venture capitalists or angel investors. Many great projects started via social business networking. Historically great places for seeking these types of people are in: professional networking groups; professional associations; or perhaps an entrepreneur network or similar group.
Approaching Venture Capital Firms
The type of venture capital firm you approach will depend on your business type. Targeting specific types of firms will yield the best results when seeking VC financing. It is important to note that many VC firms have diverse portfolios with a range of clients. If this is the case, finding gaps in their portfolio is one strategy that might work.
Some initial research on the types of VC firms will save a lot of time and effort. When approaching a VC firm, consider their portfolio:
- Business Cycle: Do they invest in budding or established businesses?
- Industry: What is their industry focus?
- Investment Level: Is their typical investment sufficient for your needs?
- Location: Are they regional, national or international?
- Return on Investment: What is their expected ROI?
- Involvement: What is their involvement level?
Venture Capital Funding
VCs are very selective in deciding what to invest in and reject about 98% of opportunities presented to them. VCs typically look at the following qualities when selecting investments:
- A solid business plan
- A good management team
- Investment
- Passion from the founders
- A good potential to exit the investment before the end of their funding cycle
- Minimum returns in excess of 40% per year
Venture capitalists tend to nurture the companies in which they invest in and typically assist at four stages in the company's development: idea generation, start-up, ramp-up, and exit.
Structure of the Funds
Most venture capital funds have a fixed life of 10 years. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio.
Compensation
In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value).
Venture capitalists are business opportunity seekers who are usually compensated through a combination of management fees and carried interest. In a typical venture capital fund, an annual management fee can be up to and equal to 2% of the committed capital. In terms of carried interest, a share of the profits of the fund (typically 20%), paid to the private equity fund’s management company as a performance incentive. The remaining 80% of the profits are paid to the fund's investors.
