How will you find the money to turn your dream business into a reality? Fortunately, we live in an age in which financing possibilities span well beyond the standard bank business loan. Whether you are contemplating a start-up or are ready to expand your already-successful business, research all your options so that lack of planning doesn’t cost you more in the long-run. One such financing option is through a venture capital firm.
VC firms use the money of high-net-worth investors (sometimes referred to as “angel investors”) who want to significantly increase their return by infusing their money into riskier enterprises for greater ROI. The funds are professionally managed and usually reserved for potentially high-dollar, emerging growth companies with the possibility of attaining $25 million in sales within five years. Some VC’s may require an equity stake and an active role in your business as a condition of partnering. An active role may include a board position, sales and marketing planning, or decisions regarding corporate governance. Amounts you may borrow vary, but the average is $500,000 up to $10 million. Obtaining money from a VC firm is not appropriate for every business. Each firm adheres to an investment profile, limiting the types of business in which it invests. This allows the members of the firm to become more versed in a particular field, subsequently enhancing the possibility of successful investing.
Venture capital firms take on risky investments that banks may turn down; therefore, it is difficult to secure funding if you’ve not thoroughly prepared your business plan. Also, be prepared to pay a higher interest rate than you would pay on a bank loan.
In the next installment, we’ll discuss what you can expect going forward in the VC firm lending process.