If you're seeking venture capital (VC) to help launch or accelerate a business, first understand a little about who venture capitalists are – and are not. There are many widespread misconceptions. Venture capital is money put up by professional venture capital firms that invest alongside management in young, rapidly growing companies that have the potential to develop into major economic contributors, says the National Venture Capital Association (NVCA).
Many people think of venture capital investors as wealthy financiers looking to fund small business startups, but that's more a description of angel investors. In reality, professionally managed venture capital firms are usually private partnerships or closely-held corporations with an available pool of money that comes from pension and endowment funds, foundations, corporations, wealthy individuals, foreign investors and the venture capitalists themselves. Venture capital investors are highly demanding – typically seeking a big payback (like 10 fold or more) within five to seven years. They may sift hundreds of opportunities to find one they like. Here are some things to know as you seek small business finance via the venture capital route:
- Venture capital investors finance new and rapidly-growing companies
- Some venture capital companies will consider startups; others want only young but established businesses
- Venture capital investors take an equity ownership stake in the business
- Venture capital investors often seek active management participation and may help develop products and services
- Venture capital investors take high risks with the expectation of high rewards
Find firms that look like a good fit with your opportunityThe National Venture Capital Association is a membership group of venture capital firms and venture capital funds, and has a venture capital directory.
Discover a typical venture capital firm's investment criteria and tips for entrepreneursAllegis Capital is just one among hundreds of venture capital firms in the U.S., but its website offers a helpful window into how a VC firm is set up and operates.
Tap a free online venture capital directory of over 1,400 firmsvFinance is an outstanding online service that has one of the most comprehensive venture capital directories anywhere. There's help finding a venture capital firm, venture capital broker, China venture capital, venture capital news and much more.
For small sum, tech startup backing, check out Y CombinatorThis unique seed funding group splits its time between Cambridge MA (summers) and Silicon Valley (winters).
Try Small Business Investment Company (SBIC) financingSBICs are licensed by the U.S. Small Business Administration but are privately owned and funded investment firms that provide venture capital for small business.
SBIC Hotlist published by the SBA. The National Association of Small Business Investment Companies (NASBIC) can also help you locate one.
Peek into venture capital funding resources at other online portalsBusiness financing "portal" sites offer a variety of ways to fund a business, including venture capital.
Raise your own equity offering onlineActive Capital is the only low-cost Internet-based option to register securities for sale -- up to $5 million/year.
- Button down your business plan. A business plan is a "gotta have" piece in your financing puzzle. The plan should be realistic and cover all the bases. Avoid vague goals and pie-in-the-sky projections. It should document why the business needs financing, and how much is needed to reach a specified level of growth and profitability.
- Put in your own money. If you want others to back you and your ideas, be prepared to ante up yourself. Investors want to know that you are risking something personally and that you will go the extra mile to make it a success.
- Demonstrate a flair for management. The more charisma you can show on the finance dance floor, the better. And not just you, but your entire team as well. You must convey to potential funders that you are the best person on earth to manage and supervise the business you plan to create. Or if not you, that you have that person in tow.
- Create budgets and financial statements that tell the tale. If your business is already operational, create some basic financials on how you are doing. Don't worry if you aren't looking completely gorgeous just now. Investors know that if everything were perfect, you wouldn't be looking for money.
- Prepare - and then prepare some more. People with money to invest are in great demand. They've seen all kinds of plans, so they are likely to ask tough questions, be skeptical of your answers and have little patience for running off at the mouth. Your best step is to be totally comfortable with your plan.
- Show how much you'll need and how you'll use it. It's critical to estimate how much money you think you will need overall. All good investors will want to know this, as well as what you plan to do with the money.