Venture Capital is a specific term that refers to funding obtained from a venture capitalist. These are professional serial investors and can be individuals or part of a company. Oftentimes, venture capitalists have a niche based on the type of business, size, or stage of growth. They are likely to see many proposals in front of them (sometimes hundreds a month), become interested in some, and invest in even less. About 1-3% of all deals that are put to a venture capitalist get funded. So with the numbers this low, it must be clearly impressive.
Growth is generally associated with accessing and conserving cash while maximizing profitable business. People often see venture capital as the magic bullet to fix everything, but it’s not. Owners must have a strong desire to grow and a willingness to relinquish some ownership or control. For many, not wanting to lose control will make them a poor fit for venture capital. (If you figure this out early on, you could save yourself a lot of heartache.)
Remember, it’s not just about the money. From a business owner’s perspective, there is money and smart money. Smart money means it comes with experience, advice, and often contacts and new sales opportunities. This helps the owner and investors to grow the business.
Venture Capital is just one way to finance a business, and in fact, it is one of the least common, but most discussed. It may or may not be the right option for you (a discussion with a corporate advisor might help you decide which path is right for you).
Here are some other options to consider.
your own money – Many businesses are financed from the owner’s own savings or from money drawn from equity in the property. This is often the easiest money to access. Often, an investor would like to see some of the owner’s equity in the company (“skin in the game”) before considering investing.
Private capital – Private Equity and Venture Capital are almost the same, but with a slightly different flavor. Venture Capital tends to be the term used for an early stage company and Private Equity for a later stage of financing for further growth. There are specialists in each area and you will find different companies with their own criteria.
FF&F – Family, friends and fools. Those closest to the business and often unsophisticated investors. This kind of money can come with more emotional baggage and interference (rather than help) from your vendors, but it can be the quickest way to access smaller amounts of capital. Often several investors will offset the full amount needed.
angel investors – Major business angels differ from venture capitalists in their motives and level of involvement. Often angels are more involved in the business, providing ongoing mentoring and advice based on experience in a particular industry. For that reason, matching angels and owners is essential. There are important networks of easily located angels. Applying to them is no less demanding than applying to a venture capitalist, as they still review hundreds of proposals and accept only a handful. Often the demands around exit strategies are different for an angel and they are satisfied with a slightly longer term investment (say 5-7 years compared to 3-4 for a venture capitalist).
start – grow organically by reinvesting profits. No external capital is injected.
Banks – banks will lend money, but they are more concerned with your assets than your business. Expect to personally guarantee everything.
leases – This can be a way to finance private purchases that allow for expansion. They will normally be leases on assets, and will be guaranteed by those assets. It is often possible to lease specialized equipment that a bank would not lend.
Merger/acquisition strategy – can try to acquire or be acquired. In general, even a merger has a stronger and a weaker partner. Combining the resources of two or more companies can be a path to growth, and when done with a company in the same business, it can make a lot of sense, at least on paper. Many mergers suffer from cultural differences and unforeseen sentiments that can kill profits.
Inventory financing – Specialty lenders will lend money against the inventory you own. This can be more expensive than a bank, but could allow you to access funds that you might not otherwise have.
Accounts Receivable Financing / Factoring – again a specialized area of loans that can allow you to access a source of funds that you did not know you had.
initial public offering – This is normally a strategy after an initial capital raise and a business has been shown to be viable through track record development. In Australia there are several ways to “list”. They are useful for raising large amounts of money ($50 million or more) as the costs can be quite high (over $1 million).
MBO (Management Takeover) – This tends to be a later stage strategy, rather than a startup financing strategy. In essence, debt is created to buy out owners and investors. It is often a strategy to regain control from outside investors, or when investors seek to divest the business.
One of the most important things to remember in all of these strategies is that they all require a significant amount of work to make them work, from the way the business is structured to dealing with staff, vendors, and customers. and prepared to make the company attractive as an investment proposition. This process of preparation and de-risking can take anywhere from three months to a year. It is often expensive both in actual expenses (consultants, legal advice, accounting advice) and in shifting the owners’ focus from “sticking to the fabric” and making money within the business to a focus on how the business is presented.