EARLY GROWTH FUNDING – VC FUNDING
Seed funding for your business and start-up costs are, obviously, vital for getting your dream off the ground. Getting these foundational expenses covered by family and friends, crowd funding and/or angel funding is a great way to go. Once you have gotten established, however, and need more substantial dollar amounts to support your business’s early growth, it’s now time to consider VC (Venture Capitalist) funding.
Now that you have a bit of a track record with your business and the risk for investors starts to diminish, your investor options begin to increase even more.
I touched on Venture Capitalists in an earlier blog post. Venture Capitalists and VC Funds are individuals or investment companies that use their money (capital), expertise (managerial and technical), and other resources in an effort to continue growing your new business endeavor. Venture Capitalists are generally compensated via:
- 2% management fee, plus…
- Up to 20% interest carried on profits or…
- Interest on their investment of 25-30%
When referring to a VC FUND, I’m talking about third-party investors who pool their monies (frequently in an LLC or LP) and manage them for the purpose of investing in businesses that may be high risk for normal bank loans. In general, these funds have a “fixed life” of about 10 years, which includes 3-5 years of an investment cycle, followed by more focus on management and perhaps making follow-up investments in the existing portfolio.
VENTURE CAPITALIST FIRMS –
In the early growth phase, VC funds can typically maintain $20-50 million per fund (Series A) compared to VC funds used for mid- to late-growth investments (Series B and C), which can hold $2-14 billion.
Common features of Venture Capitalist Funds include the following:
- Investors have a legal right to receive interest and repayment of their capital whether the business succeeds or fails.
- Venture Capitalists invest in exchange for equity stakes in the businesses they help.
- ROI depends on the profitability of the venture and its growth.
- In general, a Venture Capitalist/Fund will receive its return on investment by selling its shares in the business when it is eventually sold to a new owner after several years.
- Due to the fact that their investment is not liquid, VC/Funds will do their due diligence before investing and will want to take part in the growth plan of the business.
A few more points of interest in regard to Venture Capitalist Funds:
- In 2011 there were approximately 934 active VC firms
- Through the 4th quarter of 2011, VC funds invested $29.1 billion in 3,752 deals in the U.S.
- Two-thirds of the 934 invested in three deals or less; 41% did only one deal
- 250 (27%) of the 934 firms did no new deals, which may indicate they are running short of capital.
In my upcoming articles, I will begin to address the actual process of going after Venture Capitalist funds for your business. Have you considered whether or not your business would warrant or be of interest to a VC Fund?