Venture Capitalists are Willing to Take Risks that Lenders Will Not
Business Startup Funding and Venture Capital
New small business startups often have difficulty finding the finance needed to set up and carry on their business till it begins to generate funds needed to carry on the operations. Lenders typically look for past performance record and/or collateral security. At the same time, innovative but unproven projects might actually have the potential to generate high profits.
Venture capital providers are willing to take risks with such projects. Even if a few of their projects do not deliver on the promise, these private investors might be more than compensated by the high returns they earn on other projects, some of which might even exceed their expectations. On the other hand, financing companies that earn only interest on their loans might not be able to afford such risks.
However, the private investors are not philanthropists and the entrepreneurs will have to come up with a fully worked out business project, and convince the investors how the project will be able to earn high profits.
It is the high profits potential that the venture capitalists look for. An innovative business that can quickly achieve market leadership and command premium prices for its product is the ideal project for them. Such a business might be able to issue shares to the public at an early date and the private investors hope to sell their equity holdings during such an issue at a price much above what they paid for it.
Private Investors and Management Control
Ideally, entrepreneurs would like to receive business funding without any strings attached. Normally, investors who invest substantially in a business will expect to exercise some management control over the business. Venture capital investors, on the other hand, might actually prefer to let the entrepreneurs manage the business on their own, provided they do a good job of it.
However, most startups can benefit from the business experience and contacts of the venture financiers. Angel investors might even feel excited to act as mentors. Entrepreneurs with little experience and inadequate contacts will thus find it a good strategy to seek the guidance and help of these investors.
Raising Venture Capital Funds
While venture capital companies are formal organizations, angel investors are individuals and entrepreneurs will have to be more careful in dealing with them, such as making sure that they are accredited investors. Guy Kawasaki’s blog offers a lot of valuable and often humorous advice on dealing with angel investors and venture capitalists.
Kawasaki is a venture capitalist himself and his advice will help understand what venture financiers are looking for. Such an understanding can be invaluable in successfully raising venture capital.
The National Venture Capital Association is an association of venture capitalists in the USA and entrepreneurs seeking venture funds might be able to find a suitable agency among their members. Small Business Investment Companies (SBIC) are licensed by U.S. The government should lend money to small companies.
Venture capital is a source of business financing for new business startups. It is provided by private equity investors who will invest in a startup if they think that the venture is an innovative and marketable project that has the potential to earn high profits in a short time. For new entrepreneurs with ideas for such projects, such private capital can be a boon because small business startups typically find raising funds a difficult proposal.