5 Common Features of Venture Capitalist Funds Who Can Help Fund Your Business Growth

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?

What Should You Consider if You Want to Fund a Business with the Seed Funding Option?

As I discussed in my last blog post outlining the Three Key Types of Funding, funding a business on your own is very often the choice made by entrepreneurs, especially in the early, start-up phase of the business.  The option to self-finance in order to get things off the ground, as with other funding methods, has its upside and its downside.

The obvious first consideration is the significant amount of money that may be required to get things underway when pulling together inventory, employees, property leases, etc.  This can easily move into the range of $100-200K before your business starts to turn a profit.  The time frame that this might require can easily run into three years or more.

 

Seed Funding Key Consideration – 

If you have access to funds of this kind, it can be a great way to go.  One of the things that makes this such an attractive option is the pot at the end of the rainbow (also called “profit”). With seed funding, when your company becomes profitable, the profits come back to you.  However, what this also means is that if your business flounders, if it’s a failure…if the pot at the end of that rainbow is empty…you have a lot to lose.

 

Seed Funding Key Advantage – 

Another very attractive part of the seed funding piece for many is the fact that YOU are in control of your business and how it is run.  You and those you choose to help manage your business venture can run things as you see fit, whether it is day-to-day decisions or future deals, such as private equity sales.  There’s no waiting for anyone else’s stamp of approval!

 

The promise of profits and control are a huge motivation for choosing to seed fund a business for an enormous number of start-ups.  If you’ve had your own experience (whether good or bad) with seed funding your business, maybe you can share a little insight.  In my next blog post, I will talk about another type of funding for your business…Angel Funding.

Three Key Types of Funding and Criteria You Need to Know to Finance a Business

If you have come to the conclusion that financing your business is the most beneficial and…in the end…most lucrative option for starting or growing your company, you should familiarize yourself with the overall “funding landscape”.

Before I say more about the general landscape, I do want to address a few facts of which you should be aware if you are a female business owner. Albeit the rate of women starting businesses these days is twice that of men (women own 30% of privately owned businesses), statistics also show that:

  • Most female-owned businesses earn less than six figures
  • 30% of the businesses owned by women generate only 11% of business sales
  • If you’re a self-employed woman, you make 55% less than a self-employed man
  • Women seek less financial help for their businesses
  • Women historically have had less access to funding, but that is changing

Different kinds of funding sources often focus on financing businesses based on different criteria, such as:

  • The stage of the business cycle you are in
  • How much risk you’re willing to take (if you’re willing to take more risk, you have more opportunities)
  • What you already have in the way of financial resources
  • How much you want to control your company

As a rule, the more financing you need, the longer the funding process will take.  It’s important you’re clear on where your business is in the funding landscape:

  1. Seed Funding – getting things off the ground; often done by owner, family and friends
  2. Bridge/Angel Funding  – your business is showing signs of growth, revenue, and merit
  3. Venture Capitalist – when your business has signs of quick growth, as well as the potential for a quick return on investment

Keep in mind that there is no “right” or singular way to finance your business venture.  Although the pursuit of funding has been described by some as a “shark tank”, it should be comforting to know that there are definitely people out there wanting to invest in businesses for the right reasons (i.e. Crowd Funding).  Make yourself aware of the basic processes and do your due diligence.

Our future blog posts will expand on each of the three funding types, and explain the advantages and disadvantages for each one. Be sure to start thinking about the stage of business you are in and your risk level as you finance a business.