Venture capital is a form of financing for a company in which you give up some level of ownership and control of the business in exchange for capital for a limited timeframe, usually 3-5 years. Venture capitalists usually exit through an Initial Public Offering (IPO), a merger, a sale of the business or a buyout.
Venture capital firms are limited partnerships or closely held corporations that invest in early-stage, risk-oriented business endeavors. Most firms usually have a general manager who serves as the fund manager with the investors serving as limited partners. The limited partners put up 99% of the money, while the general partner does all the sourcing, due diligence, investing and monitoring.
Essentially the venture firm is a group of investors who have pooled their money towards investments focused within certain parameters. The participants in venture capital firms can be institutional investors like pension funds, insurance companies, foundations, corporations or individuals.
The investment most commonly is secured with private stock in the venture or a legal instrument that can be converted to stock. Investments range from $500,000 to $5 million, although there are occasionally investments for as low as $50,000 or as high as $20 million.
Unlike banks, which seek their return through interest payments, venture firms are looking for capital appreciation. Their payoff is how much their original investment has increased. Venture firms generally are looking for a return of five to ten times the original investment.
Venture capital firms usually focus their funding by geographic location, industry or stage. Stages of a company's growth are delineated in a number of ways, but some of the most common are:
- Seed financing
- Ranging from $50,000 to $500,000, these funds are to help the entrepreneurs prove that an invention or concept works. The money usually pays for product development and market research.
- Start-up financing
- The usual range is $50,000 to $1 million for initial marketing and product production.
- First or Early Stage
- Usually $500,000 to $15 million for helping the enterprise at the point it has completed its product, but has little or no revenue.
- Second or Later Stage
- The usual range is between $2 million and $15 million for a firm with product and revenues, and which may have already taken other institutional money.
- Third or Mezzanine Stage
- The usual range is between $2 million and $20 million for a profitable company looking to make a major expansion leading to an IPO within 3 to 18 months.
- An investment of $2 to $20 million made only 3 - 12 months before an IPO.
Finding Venture Capital
Venture capital firms can be found worldwide. The National Venture Capital Association provides a wide variety of resources for finding venture capital firms. Venture capital can also be found through bankers, insurance companies, and business associations.
The internet is becoming a popular venue for finding venture capital. There are a number of sites devoted to capital searches. Internet venture capitalists see the internet not only as a vehicle in making their job easier with the use of such methods as evaluating an email submission of the executive summary for an entrepreneurial venture, but also as a source of new venture capital opportunities.
While there is more venture capital available than there has ever been, a major portion of that money goes to technology-related businesses. Health care, also, has been well-funded traditionally.
Seeking venture capital can be a soul-searing experience that can be as time consuming as the entrepreneurial venture itself. However, with the right match, it can also be one of the most rewarding relationships both financially and inspirationally that you find in establishing your venture.