Business Growth: How and When to Raise Capital
If you have ever needed to raise capital, or are looking to raise capital down the road, you will want to review these rudiments relative to making your pitch to potential investors.
David S. Rose:
In an article titled Venture capital 101: What is venture capital?, the National Venture Capital Association explains the basic structure of a venture capital (VC) firm, the philosophies that guide it, and the results that come from VC investment. The article focuses on several unique attributes of VC firms, and it explains how they make their investments, how they spend their resources (money, time, and contacts), how they evaluate potential venture investments, how VC investments pay off, and how the proceeds are shared among the stakeholders.
10 Things to Know Before You Pitch a VC for Capital
If an entrepreneur secures funding through a VC firm, it is essential to understand how most of these firms approach new ventures. VC firms manage money that has been invested by funding and supporting the companies that look the most promising and innovative. VC firms buy stock that is essentially worthless at its present value and develop the value of the venture for a large payout in 3–8 years. In addition, VC firms hold extra funds aside for follow-on investment in the venture.
VC firms invest far more than money in a firm. During the start-up phase of a venture, it is common for someone at the firm to be on the phone or in meetings every day with his or her entrepreneurs as well as sitting on the board of directors and providing useful contacts when necessary. Because VC firms only have so many people that they can commit, they are limited to the number of projects that they can fund. According to the National Venture Capital Association article, “With a startup, daily interaction with the management team is common. This limits the number of startups in which any one fund can invest. Few entrepreneurs approaching VC firms are aware that they essentially are asking of 1/6 of a person.”
VC deals often come from entrepreneurs who have ideas that are, in a sense, interruptive. Many of these deals come from people whose ideas were rejected by firms for whom the entrepreneurs previously worked. This is because larger firms generally do not wish to interrupt their own established sources of revenue, and they tend to cut funding on research and development when they perceive that their markets are tightening.
VC investments are generally created by establishing a limited partnership. The VC firm is the limited partner, and the venture itself is the general partner. Over a period of 3–8 years, the VC works alongside the entrepreneurial venture team to grow the company to a point where it either goes public or is purchased. One in six VC-funded ventures go public, and one third of VC-funded futures are acquired. Proceeds for a successful outcome are typically shared equally between the founding entrepreneurs and the VC firm. When VC firms succeed, the rate of return is much higher than the returns that are available in public markets.
Be smart and be encouraged,
Ted. (2008). David S. Rose: 10 things to know before you pitch a VC for capital. Retrieved March 17, 2014 from YouTube website https://www.youtube.com/watch?v=lzDBrMisLm0.
Venture capital 101: What is venture capital? (2010). In Robert Price’s Entrepreneurship (6th ed.). New York, NY: McGraw-Hill.