Financing My Small Business: A Brief Overview of Venture Capital

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:

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Four Steps to Help You Get a Loan recently reported that only 5% of lenders have eased their standards to loan to small businesses. This confirms what many small businesses already know – it is tough to get funding. So what is a small business to do when it needs money?

If your business needs a loan to survive, there are several things that you should do as a small business owner first. While these strategies cannot guarantee a loan, they can help you have the best chance to secure funding when you need it.

1. Get your personal credit in order. If you are borrowing money from a financial institution, the institution is going to want to see your personal credit unless your business has substantial assets and financial backing. In most cases, you will need to personally guarantee the loan. If your credit score is low, you have had recent bankruptcies, or you are requesting a large loan amount and have no collateral, you may need to look at other funding sources.

2. Have a good business plan. Banks want to know you have thought about your business. The lending officer will want to see the business plan and know that the financial targets are achievable. As part of the business plan, be able to clearly define where the funds will be used. If you can’t explain your business and its goals (and why you have), a bank can’t determine what type of risk you are.

3. Have good tax and legal records. Make sure you have copies of your Articles filed with the Secretary of State and any periodic reports (and make sure your periodic report has been filed!). Have current bylaws or an operating agreement. Have proper paperwork between the owners of the business. Have intellectual property agreements when needed. Have copies of the business’s tax returns for at least the previous three years (and maybe up to five). If the business is closely held (especially with fewer than four owners), have copies of the owners’ personal tax returns. Make sure all local, state, and federal taxes are current – including employment taxes and unemployment insurance. Finally, do a checks to see if there are any liens or UCC filings.

4. Lastly, schedule a small business checkup with your attorney and your CPA. I can go through all your paperwork and see what is missing from a legal perspective, make sure everything is up to date, and then be a reference for the bank to call with any questions. A CPA would be able to do the same thing from a financial perspective.

If you have any questions, don’t hesitate to call me, your small business attorney serving the Denver Metro Area, the Front Range, and beyond at 720-258-6647.