Venture Capital is a specific term that refers to financing obtained from a venture capitalist. These are professional serial investors and can be individuals or part of a company. Venture capitalists often have a niche based on business type, size, or stage of growth. They are likely to see many proposals in front of them (sometimes hundreds a month), be interested in a few, and invest in even fewer. About 1-3% of all deals that are put to a venture capitalist are financed. So with the numbers this low, it must be clearly impressive.
Growth is generally associated with accessing and preserving cash while maximizing profitable business. People often see venture capital as the magic bullet to fix everything, but it’s not. Owners must have a strong desire to grow and a willingness to relinquish some ownership or control. For many, not wanting to lose control will make them a poor choice for venture capital. (If you figure this out early on, you could save yourself a lot of headaches.)
Remember, it’s not just about the money. From a business owner’s perspective, there is money and smart money. Smart money means it comes with experience, advice, and often leads and new sales opportunities. This helps the owner and investors to grow the business.
Venture Capital is just one way of financing a business and, in fact, it is one of the least common, but most discussed. It may or may not be the right option for you (a discussion with a corporate advisor could help you decide which path is right for you).
Here are some other options to consider.
your own money – Many businesses are financed from the owner’s own savings or from money taken from the equity in the property. This is often the easiest money to access. Often an investor would like to see some of the owner’s fund in the business (“skin in the game”) before considering investing.
Private capital – Private Equity and Venture Capital are almost the same, but with a slightly different flavor. Venture Capital tends to be the term used for an early stage company and Private Equity for later stage financing for further growth. There are specialists in each area and you will find different companies with their own criteria.
FF&F – Family, friends and fools. Those closest to the business and often unsophisticated investors. This type of money may come with more emotional baggage and interference (rather than help) from your providers, but it may be the fastest way to access smaller amounts of capital. Often multiple inverters will offset the full amount needed.
angelic investors – Major business angels differ from venture capitalists in their motives and level of involvement. Angels are often more involved in the business, providing ongoing mentorship and advice based on experience in a particular industry. For that reason, matching angels and owners is essential. There are important networks of easily reachable angels. Applying to them is no less demanding than a venture capitalist, as they still review hundreds of proposals and accept only a handful. Often the demands around exit strategies are different for an angel and they are satisfied with a slightly longer term investment (say 5-7 years compared to 3-4 for a venture capitalist).
start – grow organically by reinvesting profits. No external capital is injected.
Banks – Banks will lend money, but they are more concerned about your assets than your business. Expect to personally guarantee everything.
Leases – this can be a way to finance particular purchases that allow expansion. They will normally be leases on assets, and will be guaranteed by said assets. It is often possible to lease specialized equipment that a bank would not lend.
Merger/acquisition strategy – can try to acquire or be acquired. In general, even a merger has a stronger and a weaker partner. Combining the resources of two or more companies can be a path to growth, and when done with one company in the same business, it can make a lot of sense, at least on paper. Many mergers suffer from cultural differences and unforeseen sentiments that can kill profits.
inventory financing – Specialist lenders will lend money against the inventory you own. This can be more expensive than a bank, but could allow you to access funds that you might not otherwise have.
Accounts Receivable Financing / Factoring – again a specialized area of loans that can allow you to access a source of funds that you did not know you had.
initial public offering – this is normally a strategy after raising initial capital and having proven that a business is viable through the development of a track record. In Australia there are several ways to “list”. They are useful for raising large amounts of money (50 million dollars or more) as the costs can be quite high (more than 1 million dollars).
MBO (Management Buyout) – This tends to be a later stage strategy, rather than a startup funding strategy. In essence, debt is generated to buy off owners and investors. It is often a strategy to regain control from outside investors, or when investors are looking to get rid of the business.
One of the most important things to remember about all of these strategies is that they all require a significant amount of work to make them work, from how the business is structured to dealing with staff, vendors, and customers. and prepared to make the company attractive as an investment proposition. This process of preparation and elimination of risks can take from three months to a year. It is often costly both in actual expenses (consultants, legal advice, accounting advice) and in changing the focus of owners from “sticking to knitting” and making money within the business to a focus on how the business is presented.