The venture capital industry has experienced huge growth since the 1980s. An increase in follow-on investing has raised the amounts of money in investment rounds to the millions of dollars. The National Venture Capital Association reports that 2001 to 2010 saw a 55 percent increase in the average venture capital round from 1989 to 1998.
Small businesses attempting to solicit funding from venture capitalists are stepping in to a whirlwind of investment money flowing around the world. Getting a foot in the game may be difficult for entrepreneurs, especially since the economic crisis of 2008.
A good venture capital firm has consultants on hand that are experienced in a variety of markets and management schemes. Venture capital financing allows an entrepreneur to take advantage of this in-house experience to put his business on more solid footing. The right management and market consulting can help a business avoid mistakes and seize opportunities when they arise. Another upside is that banks will be more willing to extend credit to the business once it has a solid equity base, thanks to the venture capital firm.
Three downsides accompany successful solicitation of venture capital:
The equity position in the start-up that is taken by the venture capital firm may be enough to be a controlling interest. This effectively robs the entrepreneur of ownership in his own company. He must look for a venture capital firm that only wishes to have a minority stake in his company. The decision making process is also altered because the firm may want one of its members in an administrative or managerial capacity within the company. This may prove problematic because the firm sometimes has veto power over key decisions. A final disadvantage is the funding schedule, especially if it conflicts with the entrepreneur's anticipated capital needs.
Venture capital is easier to obtain than bank credit because venture capital firms look to the long-term future of a start-up company. Banks focus on the immediate future and the past, which for a new company does not exist. This makes it hard for the bank to feel confident enough to lend the business money. Venture capital firms look for businesses which they expect to turn a profit quickly and repay their investment with a decent return. The firm may wish to establish a long-term equity position to be liquidated in the event the start-up offers shares of stock on the public exchanges.
To get the attention of venture capitalists and to keep them interested, it is necessary to be professional and prepared well ahead of time. The entrepreneur will have to pitch his company to any firms that express interest in his idea. Pitching an idea to a group of hardened veterans in the investment business may seem terrifying, but the entrepreneur can rest assured that he is following a time-honored tradition. Venture capital has financed industries in America for generations. Entrepreneurs that seek venture capital are participating in the economic future of America.