What is Venture Capital
What is a venture capital? What do venture capitalists want from fledgling companies in exchange for investment? What does venture capitalist look for in a potential investment?
How does one successfully sell a business funding invitation to a venture capital firm? Find the answers to these questions in our basic guide.
A venture capital is funding provided by an investment firm to a fledgling company in various stages of development. It differs from the investment of an angel investor in that the vehicle making the investment is a legal business entity – partnerships or limited liability companies -- rather than an individual. This business entity is composed of individuals and institutions that pool their money for investment in early-stage companies that promises to generate high returns.
What Do Venture Capitalists Want in Exchange for Investment
A venture capital is so called because it is an investment that carries a high risk for the investor. It is provided to companies that typically are: in early stage of development, and those that are too young to obtain a bank loan or raise capital through a public offering. In exchange for cash, a venture capitalist gets shares in company where he puts his investment, giving him the right to participate in the management of that company. Because of the high risk associated in making the investment, venture capitalists demand higher returns than what is usually sought for by investors in established companies. The realization of this return is through a trade sale of the company or initial public offering. This is usually is at a pre-determined time. Afterwards, the venture capitalist can make follow-on investments.
What Does Venture Capitalist Look for in a Potential Investment?
Logically, venture capitalists wouldn’t just throw their money in just anybody looking for capital to fund some idea. They are looking for novel ideas that promise to generate high investment returns in the early stage of its commercialization. These investment opportunities are usually in software, biotechnology, medicine and healthcare. But venture capitalist would not only look at the product. They will also look at the dedication and expertise of the target company’s management, and the strength of its business plan.
How to Sell to a Venture Capital Firm?
Look for a venture capital firm whose interest is in line with the business you plan to pursue. Make a thorough research to know which venture capital firm will most likely take an interest in your proposal. Look at which industry and in what type of company (early stage or established one?) does it typically invests in. Visit The National Venture Capital Association for a list of venture capital firms. Going through this “matching” process could be tasking for someone who is doing it for the first time. That is why there are venture capital consultants that can assist companies in seeking venture capital firms to pitch a funding invitation unto. You can enlist the help of a consultant to save you time and effort when trying to find a venture capital firm to fund your business.
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