Financing My Small Business: A Brief Overview of Venture Capital
You’ve got your great idea. Maybe you even have an enthusiastic co-founder, a five-year business plan, or an eye on the perfect office space. But what you don’t have are the funds to realize it all.
You’ve probably heard about venture capitalists or angel investors; it’s hard to live in the world of Silicon Valley start-ups and not have. So what are your options when it comes to raising capital for your own venture?
Traditional financing sources for small businesses tend to be banks and credit unions who use standard criteria to decide if you’re a viable loan option. They may be interested in your business idea, your background/track record, the amount of skin you have in your own game, and, naturally, your ability to repay the loan. Pretty simple.
The venture capital worlds operate a little differently in that they:
* invest equity capital, rather than debt
* take higher risks in anticipation of higher returns
* have a longer investment horizon
* are directly involved in the company (a Board of Directors’ seat, strategy planning, or governance)
Three main types of investors and approaches exist within the venture capital space.
Private Equity (PE) – PE incorporates a number of investment options that are usually made by private individuals/institutions.
Venture Capital (VC) – This is under the umbrella of private equity, but is managed differently and is usually designed to fund start-ups that have the potential for high growth (hello, technology companies). In addition to money, VCs provide business planning expertise and assistance.
Angel Investing – Angel investors are often entrepreneurs who have retired early — and well — who seek high returns through private investments in start-ups. They provide similar financing as VCs, just in smaller amounts. Angels often want a seat on the Board of Directors or even a daily role in the company’s operations.
Usually, the venture capital process looks like this:
1. Review business plan — the VCs review the plan and decide to move forward if it seems like a fit. Most are interested in an industry, a particular location, or a specific stage of development (start-up, early, expansion, or later).
2. Perform due diligence — this is the part where the VCs take a careful look at your proposed management team, products/services, governance documents, and especially financial statements.
3. Make an investment — money gets invested in exchange for company equity and/or debt, usually in rounds of financing.
4. VC involvement — once the investment has taken place, the VCs get involved in the running of the company.
5. Exiting the company — VCs generally expect to exit the company roughly four to six years after an initial investment, either by a merger, an acquisition, or an IPO.
If you need legal help, don’t hesitate to contact me at the Law Office of E.C. Lewis, P.C., home of your Denver Small Business Lawyer. Phone: 720-258-6647. Email: firstname.lastname@example.org.
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