Expand Your Business using Venture Capital

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Expand Your Business using Venture Capital
By Abe Cherian
Copyright ? 2005



Venture capital is a possible source of funding for new,
relatively unproven enterprises that appear to have
promising futures. However, such money is often hard to
come by.


Be realistic in your quest for venture capital. Venture
capital firms expect a business to be able to return their
investment not only with interest, but with a large profit.


Many venture capital firms are affiliated with banks,
insurance companies, other financial institutions and large
corporations. Some are owned by individuals or private
groups of investors and a few are publicly held.


Once you accept venture capital, you have relinquished some
of your autonomy and accepted the understanding that the
venture capital firm will take a large share of the profits
you earn.

As an entrepreneur, you should understand the nature of a
vendor firm, before pursuing this as a financing source.
This type of investor expects a projected return on
Investment that is directly related to risk.


The greater the risk, the greater the return expected.
Typically however, an investment firm will not be
interested in getting involved with a new firm until the
business has established itself in some way, so the risk
factor can be determined.


The venture capital firm and its interest usually depends
upon the stage of the new firm's development. Once the new
firm has established itself and has a working
organizational structure, a viable business plan and start
up arrangement a venture capital firm may be interested.


However, some firms prefer a later stage of new business
development, perhaps when the new company is in its second
or third round growth state and needs more capital either
to carry out expansion plans or to tide it over until a
merger or public offering carries it to the next stage of
corporate growth.


A company's business plan serves as the primary analytical
tool for the venture capitalist. In analyzing the plan, a
venture capital firm would most likely focus on three
features.


The product or service- Investors seek product or service
innovations that give the company a strong competitive
advantage. A new idea, backed by market surveys measuring
the appeal of the product or service and its potential
market may be tempting to such investors.


Management capability- No matter how good your product or
how innovative your service, the quality and experience of
the management is a key factor in the success of your
business. The astute investor is well aware of this and
looks for solid evidence of such skill.


The industry's growth- Investors also want to be sure that
your products or services is in a growth field. A
significant or revolutionary product improvement, by
itself, may not have appeal in a declining product or
service category.


Most venture capitalists purchase common or convertible
stock rather than burden the fledgling enterprise with
interest payments on debt or debentures. They may possibly
want more than 50 percent ownership.


Additionally, while the venture capitalists may insist on
sitting on the Board of Directors or offering management
and technical advice, they are rarely interested in the day
to day management of the enterprise, unless its survival
and their investment is at stake.


Keep in mind that the minimum investment is generally from
$25,000-$1,000,000, but investment ceilings are almost
unlimited.