Venture Capital Financing
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!
Venture Capital FundingAngel 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.