Venture financing is often an important source of long-term growth capital for small businesses.
Read more about venture financing:
Venture Financing Basics
Venture capital is a form of financing in which you give up some level of ownership and control of the business in exchange for capital for a limited timeframe.
Venture capitalists seldom invest in new businesses or grant outright loans. Instead, they seek out fast-growth companies with good stability where they can achieve a return of five to ten times the original investment. Significant sales and a solid business plan are must-haves before venture capitalists will get involved.
There are two types of venture capitalists:
- Private individuals (angels)
- Venture capital firms (small groups of investors with excess cash and an interest in financing small business)
Venture capitalists usually exit through an Initial Public Offering (IPO), a merger, a sale of the business, or a buyout.
Rounds of Funding
Most companies will receive three or four rounds of funding before going public or being acquired. The following chart outlines the most common types, amounts and conditions.
Type |
Typical Amount |
Conditions |
| Seed |
$50,000 to $500,000 |
For product development and market research |
| Start-up |
$50,000 to $1 million |
For initial marketing and product production |
| First or Early Stage |
$500,000 to $15 million |
Helps enterprise with a developed product to reach its breakeven point |
| Second or Later Stage |
$2 million to $15 million |
For firms with product and revenues that may have already taken other institutional money |
| Third or Mezzanine Stage |
$2 million to $20 million |
For profitable company looking to make a major expansion leading to an IPO within 3 to 18 months |
| Bridge |
$2 to $20 million |
Occurs 3-12 months before an IPO |
Elements of a Venture Proposal
Venture capitalists set rigorous policies for projects since their investments are not protected if a venture fails.
Most venture firms receive more than 1,000 proposals annually, and about 90 are likely disregarded because they are poorly prepared or don’t fit with the firm’s geographical, technical, or market focus.
Below is a list of elements that venture capitalists commonly evaluate in detail when analyzing a company and its proposal for investment:
- Purpose and objectives. A summary of what you’re requesting and why.
- Proposed financing. The amount you’ll need, details on how it will be used, how the financing will be structured and how the amount was determined.
- Market assessment. Specifics on the market segment, your competition and plans for getting the customers you’re targeting.
- History of company. Significant milestones (financial and organizational), how firm is structured, etc.
- Details on product or service. Full description of offerings and associated costs.
- Financial statements. Balance sheets, income statements and cash flows for past few years as well as pro forma projections showing how financing would affect the company’s future.
- List of shareholders. How much has been invested and in what form.
- Work histories and qualifications of key owners and employees. Illustrate your team’s management competence.
- Principal suppliers and customers.
- Details on anticipated problems (pending litigation, tax difficulties, etc.). Be candid about any contingencies that could affect the project you’re proposing.
- What makes your business distinctive. The “something special” that gives you a competitive advantage.
Venture Financing Agreements
After deciding to invest in your company, most venture firms prepare an investment proposal outlining their provisions for financing. The company’s management and the partners or senior executives of the venture capital firm will negotiate the conditions of this final agreement.
Common conditions of the final agreement may include:
- Ownership. You will need to carefully consider the impact of the ratio of funds invested to the percentage of ownership given up.
- Control. Since venture capital firms want to be involved in key strategic decisions of the company, they will often request that a minimum of one partner be made a director of the company.
- Annual charges. Be aware that some forms of financing that are not in the form of direct stock ownership can impose a fixed charge for interest (and sometimes principal) upon the company.
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