Private lenders typically provide venture capital to early-stage start up companies that have high growth potential in industries such as biotechnology, information technology and manufacturing. Venture capital investments are generally made as cash investments in exchange for shares in the company.
Much has been written about acquiring venture capital and there is kind of a romantic and secretative air surrounding venture capitalists. If you are seeking venture capital for your start-up, you should first not accept this popular notion of venture capitalists. Private lenders are in business to make money like everyone else. They are pragmatic highly sophisticated business people. They assume high risks with their investors money, so we really can’t blame them for being sticklers for detail when it comes to your business idea and business plan.
Venture capitalists not only provide money, but also business planning expertise and assistance to help start-ups succeed in its industry. Venture capitalists are interested in businesses that have high growth potential to quickly produce large profit margins.
You will only need to seek venture money if your business is a major undertaking requiring millions of dollars in start-up. Your business is not likely to draw any interest if you only need a few hundred thousand dollars. You will have a better chance to acquire funding for smaller amounts by exploring other funding options elsewhere on this website.
Private funding sources tend to specialize in certain kinds of industries so you must know whom you are approaching with your business proposition. You will be wasting everyone’s time if you are seeking funding for your clothing business and you are talking with a firm who is only interested in bio-medical ventures. There are also slight differences in the kinds of venture capital available.
Venture capitalists raise money from institutional and pension fund investors, such as foundations, endowment funds, retirement funds, and corporations. A venture capital firm operates much like a mutual fund by pooling these funds and looking for investments with high returns.
Typically, venture capital investments are made in companies that are already in business, but have the highest potential of growing quickly and emerging has profitable market leaders. Private venture capital is often harder to obtain than other forms of start up capital because these investors require some form of collateral before lending money. You will likely have more success with private lenders if you are a high net worth individual.
Equity capital is represented by funds raised in exchange for shares of ownership in the company. In some cases, you may have to surrender some control of management of your company. Unlike private venture capital, equity financing allows a business to obtain funds without incurring debt, or without having to repay a specific amount of money at a particular time.
You will also have to provide a clear and concise plan for your company’s path to profitability and an exit strategy to allow the private lenders to recoup their initial investment. Your exit strategy may be to take your company public in an initial public offering (IPO), sell the company outright or refinance. You exit strategy method and timetable must meet the requirements of the lenders whichever one you choose.
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