How to Raise Venture Capital
Venture capital is a type of private equity funding that is offered by venture capital companies or private finance sources to startups, upstarts, or emerging businesses that are deemed to have great potential for success or that have shown strong growth in the past. Venture capital funds also look at companies based upon certain criteria such as business size, management team, market sector, and technology. The purpose of this financing is to provide seed capital to small businesses so that they can develop into successful businesses.
Typically, venture capital funds partner with individual investors or groups of accredited investors. Investors typically include private individuals, wealthy entrepreneurs, state governments, and sometimes even the government. Private equity firms typically prefer to work with accredited investors because they do not require the same level of quarterly filings as private individuals and do not have to disclose their operating history to the public.
To receive any type of venture capital financing, a company must prepare a formal business plan. In the case of an upstart, the business plan will be used to present details on the company and its expected revenue, expenses, market focus, management strategy, and financial backup. The plan will also cover details on the personal financial information of the entrepreneur such as current and previous personal and business taxes, savings, investment history, and other personal details. All of this information must be included if the company is going to be considered a private equity firm. If the startup is not profitable, it may not be able to raise venture capital.
In addition to a business plan, most upstarts seek to partner with angel investors or venture capital firms in order to raise seed capital. An angel investor is a private individual who has access to large amounts of capital. Most angel investors do not need to provide a credit check, but they do require a significant level of credit commitment from the startup in order to provide funding. Ventures seeking venture capital are typically advised to obtain a credit facility from a lender they already have a relationship with, but in some cases independent angel investors may be required. Regardless of the type of financing obtained, small businesses that raise venture capital are subject to significant restrictions.
Unlike private equity firms, venture capital firms do not require the same levels of financial documentation and do not require you to submit personal guarantees. However, most venture capital investors require a minority stake (a portion of the equity) in the startup in exchange for their money. Also, most angel investors require the entrepreneur to create a proprietary software or physical product in order to qualify for venture capital funding.
Another option for raising venture capital is to work with accredited investors. Accredited investors are individuals who are typically wealthy entrepreneurs themselves, with years of experience and investment experience. In exchange for a higher investment (usually up to 25%) and more say in the business decisions, accredited investors provide the startup with credit card accounts at various merchant accounts. Depending on the laws of the country in which the venture capitalist lives, this credit account may also be named in the business agreement as an authorized vendor.