Venture Capital Financing
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Venture capital financing is formally defined as start-up or early growth money for business enterprises that display very high-growth potential. In many cases, the businesses are in high tech or medical fields. The basic strategy of venture capitalists is to invest money in the beginning while the company is private, and when the comp [any goes public, the hope is to make a substantial profit. In most cases, this is pleasure denied for as much as ten years as products or ideas are developed. This is not unusual, especially when medicines must be thoroughly vetted. Venture capital financing is usually not ten thousand here or there; often the bidding begins at a million dollars or more for young companies that are on the cusp of profit greatness.
VC investors are high risk takers, although they always attempt to put as much of the risk in their favor as possible by thoroughly investigating the company under consideration. Unlike banks which are dealing with depositors' money and must exercise a great deal of caution(usually) with that money, VC investors minimize their risk by often taking control of a great deal of a target company, exercising vast decision making power in many of the situations. This can be a difficult pill to swallow for some entrepreneurs who must step aside and allow others to come in to wrest control away, all in favor of venture capital financing. It's often difficult to argue with someone who is fully committed to the only life goal of making money, but Jesus said that eternal life is worth more than all earth's wealth. "The kingdom of heaven is like unto a merchant man, seeking goodly pearls, who when he found one pearl of great price went and sold all he had and bought it." (Matthew 13:45, 46)
Where are these high risk investors found? Often the money comes from pension funds, insurance companies, individuals, endowments, foundations and other cash supplies. The fact that VC firms are run and managed by individuals that former investment bankers and many of corporate finance experience often belay any trepidation that these fund suppliers might have. The typical life of a fund supplied by VC investors is about ten years. In most cases, these young companies will use this money of research and development of high profit potential products. If one has even gone to a bank and been amazed at the high cirrus cloud requirements it has for loans as compared to other lending entities, the bank pales in comparison to the lunar orbit requirements for venture capital financing. These very high qualifications for VC money often send entrepreneurs scurrying to other types of investors known as angel investors.
It is uncertain about how much of heaven is really a part of angel investors because their number one priority is making more money, not playing golden harps. These are well-off people who usually look for investing in companies in their own geographic bailiwick. While venture capital financing involves millions of dollars and can be funded in a project anywhere in the world where the profit looks promising, an angel investor, according to the Small Business Administration, invests about forty thousand dollars per project. These individuals are very savvy business people who do not part with the money easily. Angel investors are notorious for demanding extremely impressive business plans before agreeing to help fund a project and are often quite interested in helping the young company with their business expertise, although control of a company is not often sought as with venture capital financing firms.
There are approximately a quarter million angel investors around the country, also estimated by the SBA. These investors often band together to fund larger projects in their own geographic area, although some associations are spread across the country. And while venture capital financing most often takes place when VC firms actually seek out potential young companies, angel investors are typically sought out by those needing their services. The interest rates for their funding are usually much higher than prime, and these investors aren't looking for anything near the ten year funding cycle of VC investing. But often the requirements for even for angel money can be too much, and angels are usually aren't interested in real estate deals, so then where does a person needing big money go for a land development go?
The term venture capital financing might be thrown around quite loosely when, say, a real estate developer wants to buy three hundred acres of juicy land for new home sites. The developer might openly declare that his plans need venture capital to get the deal done and the guy does need venture capital, but in a less formal way than discussed earlier for high tech start-ups. This land developer needs venture capital, the bank won't talk to him and his business plan is not developed enough for an angel investor, so his best opportunity for quick money might be from a hard money lender. The VC firm is a group of investors, but the hard money lender is one lone high wealth individual who loans money in and around where he lives, and he probably already knows about that land for sale. This lender's interest rate may be as much as twenty percent or more, and he doesn't want more than a three year deal, half that if possible, and he will want the developer to put up his own house as collateral on the borrowed money he might be getting. If only land were high tech!
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