Venture Capital Funding
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Angel investors, as well as venture capital funding are two of the options brand new companies have to find much needed cash for research and development. Venture capital funding is probably going to provide many more times the cash than one or more angel investors due to the fact that VC firms are backed by pension funds, insurance companies, high income individuals, endowments, foundations and other sources. The idea of VC funding really began in the last part of the 20th century, particularly during the dot com boom from 1995 to 2000. Investors, believing that new Internet company start-ups had the profit potential of Midas began finding sources around them in which to place millions of dollars, waiting for the day these companies went public. Of course the bubble burst, but the idea of VC investment has not died; the firms are just more cautious today about the kinds of businesses they back.
Venture capital funding is all about the long haul in investing terms. A year or two in today's financial world can be like ten years for some investors. But the VC money provider has no qualms about a ten year wait on his money, because the company in which the money has been placed is thought to be the equivalent of a North Sea gusher. Make no mistake: the VC firm that goes after any small company that is just starting up has done its homework and knows exactly what the profit potential will be over time. VC providers don't invest in new lines of furniture or umbrellas or cars or diamonds. It is the high tech market and the medical products they are after because new innovations and new directions in these two fields can produce untold profit in many cases. And when a small company is sitting on just such a new product or idea but needs a lot of cash for research and development, the venture capital funding people are licking their chops in anticipation.
If a small company needing start up money for equipment and other needs doesn't want to deal with the banks, it will often seek out either an angel investor or a hard money lender. VC fund firms are out on the prowl looking for just the right opportunity in which to sink money. Angel investors and hard money lenders are typically sought out by people wanting to borrow money for commerce projects. In most cases, both angel investors and hard money lenders are most comfortable doing business close to home with people and businesses they can check out easily. Angel investors often ban together with others of their own interests, and typically don't have the money that hard money lenders have. And it's for sure that neither of these private lenders have the money nor the long term patience of the venture capital funding firm.
The angel investor often has an interest in helping the company being assisted with his own business expertise. One of the real characteristics of the angel investor is a strict demand to see an outstanding business plan being offered by the potential borrowing company. Nothing less than almost perfect will do. These investors are probably good for three to five years on their lending agreements and will look for a good return on their loan. The hard money lender is not interested in credit scores, credit history or any other detail that a bank might want to know, but rather in whether or not the borrower has a big personal stake in the project, such as his own house or other property being used as collateral. Unlike venture capital funding, the hard money lender will want his money back in about eighteen months, with a very fast interest return plus a penalty payment if the loan is terminated early. "The Lord is merciful and gracious, slow to anger and plenteous in mercy...for as the heaven is high above the earth, so great is his mercy toward them that fear him." (Psalm 103:8, 11)
When a venture capital funding group swoops in on a target company that is young and struggling to make it, the company is often vulnerable to wooing that the VC firm will do. One of the demands that is almost always made on the young enterprise by the VC firm is the requirement that it receive a large share of the company's worth and often stipulate that it have a very large voice in the company direction and future business philosophy. This can be very disconcerting at times for those whose original dreams for the company were actually in another direction. And because this is a long term relationship, often at least ten years and possibly more with mergers and other company moves, many long and intense discussions have often occurred among charter members of the directors' board. But the specter of failure or running out of money often trumps any sentimentality and the VC firm gets what it wants.
Venture capital funding is for the big boys, often dealing in money from one million to tens of millions, depending on the circumstance. These funds are managed by those with long term experience in investment banking and other related fields. It is extremely difficult to get this kind of money, but when the firms go after target companies, they often succeed in making a profitable deal for both. If your company can make at least twenty five million in sales in the first five years after product development, the VC eagles have their eye on you. The question is do you want to be picked up and carried away or perhaps there is an angel or two in your future instead.
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