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ABCs of VC: Basics of Venture Capital
Published on May 11, 2012
Read 'ABCs of VC: Basics of Venture Capital' at 'Time to Start Up,' the small business blog by BizFilings.
Venture capital is often the key ingredient to turn a start-up with enormous growth potential into a market-leading company. VC basics include how to acquire it and whether it's realistic for your business.
Is my business a good fit for venture capital investors?
Venture capitalists are willing to make significant investments in companies in order to see a huge return, tending to back companies that can grow big and grow fast. Some of the industries that currently fit this profile include:
To determine where an industry stands in terms of growth, business owners can consult resources such as the Bureau of Labor Statistics' rankings of industries with the fastest growing output.
Entrepreneurs who are thinking about going after venture capital should also consider what stage of growth their business is in. Because most VC firms are looking to make an investment upwards of $1 million, most of VC investment comes in the form of middle-stage or late-stage growth capital for businesses that have products or services launched or in a testing phase, and/or have already demonstrated the ability to bring in revenue.
How do I begin the process of acquiring venture capital?
If you think your business is well-positioned to acquire venture capital, it's time to seek out potential investors and to prepare a presentation for them.
Venture capital firms become important partners in the enterprise. Frequently, the ultimate terms of a deal will include investor representation on a company's board. Given the close relationship that upper-level management will have with venture capital investors, it's imperative that a company looking to raise funds do research to find compatible VC firms.
This research can - and should - involve talking with contacts who have experience working with venture capital outfits. Businesses should look to uncover how the VC firms operate, what their investment philosophy is, and whether they are likely to be interested in your business. Personal contacts can also play a vital role in establishing contact between your business and a possible investor.
At the same time that you're seeking out potential investors, you and your management team can be working on the presentation that you'll make once a meeting has been set up.
An effective presentation will include:
clearly articulated business plan
well-supported case for why your business is seeking venture capital
description of what your business will do with the money
realistic scenario, such as an eventual public stock offering, for how the investor will make a profit
You might also present a due diligence binder, providing a potential investor with articles of incorporation, financial statements, bylaws and other documentation that will reassure an investor that the business is well-managed.
A well-organized and detailed presentation can woo investors, but your enthusiasm and passion will also go a long way when it comes to obtaining financing.
How do I close the deal?
Securing venture capital is a multi-stage process, and will likely involve many meetings with potential investors. Prepare for the process to take some time, focusing on which VC firms are most in tune with your company's goals and culture.
If a venture capital firm decides it would like to invest in your company, it will deliver a term sheet outlining how much it would like to invest and under what conditions.
The terms spelled out will likely involve technical language and may be complex, touching on everything from redemption rights to vesting, founders activities to indemnification. However, the VC representative typically delivers the term sheet in person, and should be able to walk through the proposed deal so that it is clear. An overly complicated term sheet may be a red flag that communication will be fraught moving forward.