How to get Venture Capital Financing - What do Venture Capitalists look for?
One of the most common sources of equity financing is venture capital. But wait, what exactly is venture capital?
Venture capital can be defined as a fund raising technique for establishments that are willing to exchange equity in the company in return for money which would help to grow or expand the business. It is more like an investment fund or partnership that focuses on investing in promising start-up and emerging companies. Basically, the investment is in the company stock whereby the venture capitalist gets an ownership interest for the amount he has invested.
Acquiring venture capital requires giving up a large portion of your company whereby venture capitalists usually require controlling your Board of Directors and your company's management, without venture owning and/or controlling your company.
It is pretty clear-cut process whereby the entrepreneur has to meet certain requirements, after the deal is signed and only then can he proceed forward to the next round of financing. What happens eventually is that the sizeable return on investment is visible, once company shares or the company itself is sold.
Over time as the company establishes itself amongst its competitors, not only does its value increase but in order to keep up with the market, they would try and raise more capital.
While it is all very well, for you to seek the option of venture financing, the big question now is what are the points that venture capitalists are looking for, before they decide to go ahead and invest in your company?
First and foremost you need to have a detailed, well thought out business plan. No establishment will be interested, if your company does not have strong management, backed by years of experience, motivation and expertise. Furthermore, they will not risk it, unless they are convinced that your company is targeting a rapidly growing market and has a chance to enter the market and be successful.
Furthermore, you need to have a unique product or one that supersedes an existing one, in order to interest the venture capitalist. Considering that everyone is out to make a profit on their investment, the venture capitalist will definitely look into how quickly your company can grow.
Additionally, prospects of gross profit margins of about 40 percent or more are definitely a project that venture capitalists would be interested in as well as the proposed plans for the fast growth of the business.
It would be a definite advantage if your proposed business plan were forwarded to the company through a reputable person that they might know, or if you were introduced through someone, as it would give you a much-needed edge.
On your part, you need to do your homework right and find out everything you can about the strengths of different venture funds, reputations, particular interests and preferences. You also need to ensure that you contact the right venture capitalist to finance your business.
It is imperative that at your first meeting with the venture capitalist, you portray a thorough understanding of your business as well as be aware of the pitfalls you might face. Before investing in your business, the venture capitalist needs to be convinced that you have what it takes, the will and the relevant experience to succeed. Additionally, you need to enable him to clearly see your vision for the successful growth of the company as well as the backing of strong management who can together make it happen.
Overall you need to realize that a venture capitalists' primary motive is to make a chunk of money on their intended investment. If he feels that in the long run, your business proposal will be successful enough to give him those returns, only then will he take the risk of investing.
So how prepared do you think you are, before you approach the so-called "big guns"?
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