seeking financing for your venture, it's easier to gain the
confidence of potential investors if you speak, or at least
understand, their language. For instance, entrepreneurs are
sometimes surprised to learn that 'Venture Capital' is not a
catchall phrase meaning 'funding'. In fact, it's a specific type of
funding with definite terms and guidelines. The following is a
sampler of terms you may come across as you go through the funding
Venture capital is a process by
which investors fund early stage, more risk-oriented ventures. It differs
substantially from 'traditional' financing in the following ways:
Funding provided to new or
existing firms with potential for above-average growth.
Often provided to
startup and other emerging enterprises because they lack the
collateral, track record, or earnings required to get a loan.
The investment, typically
requiring a high potential of return, is structured so that it can be
liquidated within a three to seven year period.
Then an initial public offering
may take place, or the business merges or is sold, or other sources of
capital are found.
The entrepreneur typically
relinquishes some level of ownership and control of the business.
Venture capitalists typically
expect a 20-50% annual return on their investment at the time they are
Typical investments range from
$500,000 to $5 million.
Management experience is a
major consideration in evaluating financing prospects.
STAGES of DEVELOPMENT of a BUSINESS
Seed Capital. Source of funding for the early stages of a startup venture
where the product, process, or service is in its conceptual or developmental
From founding the business to the beginning of operations and the generation of
Initial growth phase, funded by the initial capitalization. Management and
operations are in place, and markets initially identified are being penetrated
using available resources.
The business seeks to expand its product line, expand its facilities, identify
and penetrate new markets, and continue the growth phase.
The business is established in its target markets.
Financing. Financing provided, usually by private investors or venture
capital firms, prior to a company going public, or initiating its next stage of
Placement. An offering of debt, equity or limited partnership interests to a
small number of investors (generally 35 or fewer) on a 'private' basis. Exempt
from the registration requirements of the securities laws.
Either the percentage reduction of ownership in a company resulting from the
sale of additional shares of stock, or in the difference between the price paid
by investors in either a private-placement or public financing.
The process of investigation by venture capital firms and other investors of a
company, its business, and financial plans, prior to proceeding with an
Study. A study that evaluates a proposed venture's potential for success.
An equity ownership position that is provided to a funding source as
compensation, or additional compensation, for providing management consulting,
financing or miscellaneous services.
The value assigned to the entrepreneur's contribution or investment of time and
effort in the venture.
If you have not
raised money for a venture before, you will find this a very interesting
experience. Even people who love your idea, will run to the exits when you ask
them for money. The most important thing you can do is find an experienced money
raiser or gatekeeper for your business. Have your management team interview at
least 5 candidates, and do your due diligence. You want someone with direct
connections in your industry sector who has successfully raised money in the
past for your type of company.
While the money
sources will want to hear directly from your team, the use of a properly
selected gatekeeper will help you with introductions and champion your cause.
Choosing the wrong gatekeeper can delay receiving funds or even totally wipe out
Vital to your
success is the awareness that fund raising is a never ending-process as your
company grows. The end of one round of funding is just the beginning of the next
round. You can expect to invest at least six months in finding your first round
of funding, and three to six months for your next round.
Good Luck and Happy Hunting!