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Business Financing: A Look at Venture Capital

Jul 12, 2008
Raising business finance isn't always easy, and especially so when you've not got enough assets to secure against your ambitious plans. In some cases, you're going to have to part with equity. Venture capital funding can help you grow your business, and plays a vital role in fuelling growth and innovation in the world economy.

Venture capital has helped to fuel the growth of some of the world's biggest public companies at one stage in their life-cycle. Venture capitalists are willing to run the risk of making poor returns, or losing all of their money, for a chance to hit a home run. That's why their capital tends to follow big ideas, and is hard to get when you're looking to do something that isn't too innovative with huge growth potential.

The Dynamics of Venture Capital Funds

When entrepreneurs are looking to raise money from venture capitalists, they often have a poor understanding of how the market works. Venture capital firms do not raise their funds from shareholders; they usually raise their funds from private institutions. They will then charge a management fee, and take a percentage of equity for themselves. They also have a tendency to work together - often they will have other firms invest in a deal along with them. This can be to limit their exposure, and bring in expertise. Some VC firms will take an active role in managing their investments, while others prefer to watch carefully on the sidelines.

Don't Be Too Scared Of Equity Dilution

Many a business has failed because the management have been too afraid of diluting equity. While it's important to ensure you treat your equity with the respect it deserves, you shouldn't be afraid to let go of some if it's going to mean you own a smaller share of a bigger business. Using venture capital you can explore a high risk, high reward, rapid growth strategy. In many cases VC firms will be happy to fund your business to run at a loss initially, because they can see the bigger picture. This is a luxury that you will not be able to take advantage of when you have bank managers looking at your ever dwindling balance sheet.

Raising equity also gives you an opportunity to profit from your businesses success, or idea, before you manage to take dividends or experience a liquidity event. Although it will probably only be offered in later rounds, a VC firm might be prepared to buy equity from you directly as well as buying it from the company.

Choosing The Right Venture Capital Firm For You

Working with a company that's worked in your space before can be of tremendous benefit. They will have domain knowledge to share, and will often have the right contacts in their phone book for closing partnerships and recruiting expertise. The relationship that you have with your VC could make or break your success, so make sure you pick the right one and the best fit for your business.
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