Benefits of Using Venture Capital

In this discussion, we are going to focus on the benefits of using venture capital, as well as focusing on the fact that you access to a number of different professionals that will be actively engaged in the business of assisting you in expanding your business for a substantial time frame. As we discussed before, most venture capital firms want to see that you are able to aggressively expand your business for a 3 to 10 year time frame with the intent of selling the business to a third party for significant earnings premium or that you're going to take the company public. Unlike new investors will provide you with smaller sums of money and mentorship of your business, venture capital firm will be able to effectively provide you with not only the initial capital you need to develop expanded business operations, but also the funding they need on an ongoing basis as your business expands. For instance if you are a brand-new high-tech startup company, and require an initial investment of $1 million to launch a business operations the venture capital firm will be able to provide you with that money immediately. If the technology that technology have developed becomes extremely profitable, and need an additional $10 million of capital in order to further ramp up their business operations, venture capital group will also be there to source that the additional capital that will provided to your business so that they can further expand their investment. This is the primary difference between a venture capital firm and investors. Venture capital groups are able to provide you with ongoing rounds of capital as they see that your business is becoming more and more successful.

 

Many angel investors, the capital that they can continue to provide your business, regardless of how successful it is limited. As such, if you have a valuable piece of technology or a rapidly expanding business then seeking venture capital may be the best route for you. As we have continued to discuss as one of our themes for new articles and produced for TheFinanceResource.com, it is imperative that you have the appropriate counseling place including a certified public accountant as well as an attorney that will actively assist you in negotiating the ordeal as it relates to selling equity stake in your business to a venture capital firm. In many instances, beyond selling just an equity stake in your business there will need to specific rights as a relates to buyouts, stock options, bonuses, and other forms of compensation that you'll receive if you are able to do an outstanding job in developing the business to profitability and providing the venture capital firm with a substantial return on their investment.

 

Foremost, when working with a venture capital firm is important to remember that they are seeking a substantial return on investment. You may have a vision for your business, venture capital firm that you're working with these, and then, suddenly interested in the amount of money that they can make from the ongoing investments that make in you firm with the intent of selling the business to a third party. As such, working with a venture capital group takes on a number of different challenges as you continue to negotiate sales of equity to venture capital firms concurrently maintaining a certain level of control over how you intend to run the business. If you are a highly skilled entrepreneur with years of activity within your industry leader much better position to negotiate with venture capital firms as it relates to the sales of equity stakes in your business as well as other forms of compensation as it relates to you owning and operating the business for a substantial time frame. However, you should be aware that when you work with a venture capital company that they will the vast amount of control as to how the business will be run. Primarily, this is due to the fact that they own a majority stake in the business and if they feel that you're not doing the appropriate job as needed to provide the return on investment that they are seeking then they will quickly replace you with a different CEO for manager that will operate the business differently than you intended. This is the most important things to a member when working with a venture capital firm.

 

Again,  turning to the benefits of working with a venture capital firm, one of the best things to remember is that you'll have access to a nearly unlimited number of resources as it pertains to the ongoing growth of your business. This is especially true when it comes time to sell the business to a third party. As we discussed before, venture capital firms are solely interested in making an investment with the overall intent to sell the business to another party or take the company public. Venture capital firms, for the most part, are not interested in the ongoing cash flow that they can receive their investment. Venture capital firms are very interested in the ultimate sale the business for a substantial earnings helpful. In many venture capital deals, especially as it relates to technology, these firms are seeking to receive 35% per year on their investment if not higher. As such, when determining as to whether or not you're a venture capital firm prospect, you should ensure that your firm is able to produce these types of financial results prior to seeking venture capital. If you are unable do so, then it may be in your best interest to work with smaller investors were banking institutions that can provide you the capital that you need.

 

Regarding the divestiture of your business to a third party, venture capital firms often have the means and the contacts that are necessary to package your business for sale of his become highly profitable. This includes having relationships with investment banks, private equity firms, and other businesses that specialize in purchasing businesses as well as taking companies public. This should be the last thing on your mind as it relates to the ongoing development and growth of your business. Among the 98 million businesses that are currently active with the United States about 20,000 are actively traded as publicly traded businesses on the stock exchanges. Of course, we are all familiar with the success of specific entrepreneurs that have developed highly profitable businesses within their specific fields that take the company public and receive a tremendous amount of money for their work. However, again, this is only a small fraction the companies that exist. In most cases that involve venture capital, the business is grown to a substantial size over a seven year time frame and is sold to a larger company, competitor, or to a private equity firm that is looking to get into the specific industry in which you have developed your business. Returning to the nature of the specific topic, the venture capital firm you work with closely with you as it comes time to prepare the business for sale to a third-party. This includes developing the appropriate business plan that showcases the previous operations of the business as well as the potential growth of the business as it relates to selling the business to a third party. Additionally, the venture capital firm that you're working with pertaining and appropriate mergers and acquisitions law for this is what the legal matters at pertaining to selling a business as well as retaining a major accounting firm that produced the financial statements that are necessary for the due diligence process. When selling a large business that has received a venture capital investment, the cost associated with preparing and selling the business are extraordinarily high. Typically, in most instances, the costs that can be incurred as it relates to the specific deal then are equal to approximately 80% of the total value of the deal. For instance, if you have a company you have developed that is now reached a value of $50 million then you can anticipate that the costs related to selling that business to a third party for taking the company public in the unique $3 million-$5 million range. As you can see this is a very expensive proposition for the venture capital group. However, unlike privately owned businesses, the venture capital firm that works with has knowledge providing you with the investment that you'd have needed in order to develop that business but also pick up the tab as it relates to preparing the business for sale.

 

Other benefits of working with a venture capital firm is that they're very happy to reward substantial success among the portfolio investments. Unlike an angel investment deal there a specific amount of equity is supposed directly to a small third-party with the intent to generate a cash flow for a moderate sales premium and business comes to sale, venture capital firms reward top executives handsomely when it comes to outstanding performance. Again, you are going to need to provide a tremendous amount of the equity and controlling your business to this venture capital firm but through your appropriate negotiations you will be able to attain it things such as stock options, restricted stock, bonuses, and other forms of compensation that will be provided to you in the event that the business becomes extremely successful. As an entrepreneur, and the other benefits of working with a venture capital firm and other highly successful enterprise is that you will be able to very easily raise capital for any future entrepreneurial endeavors that you're seeking. This, of course, like anything else in life is the fact that you're able to prove that you been successful in business once then you'll be able to continue to receive capital investment that you need for any future ideas are businesses that you intend to develop. Of course, this is the Catch-22 of venture capital and that you first need to prove that you're successful in order receive the capital you need while concurrently being in a stage where you've not yet proven yourself to be successful in business. As such, prior to seeking venture capital strongly recommended if you are able to do so then it may be in your best interest to start the business on a very low budget so you can produce something of candidate value to a venture capital firm prior to approaching them for investment.

 

In the future discussions we will, again, focus on the tremendous benefits of using venture capital. We are also the focus on some of the negative issues that occur when you are seeking investment from a venture capital firm. The strongest things that we are going to discuss about this theme of articles, as it pertains to venture capital, is that again, you are going to need to seed a significant amount of equity in control of your business to a third-party company that is solely interested in producing as much profit as possible for their firms and their respective investors.

 



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