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Venture Capital Financing

What is venture capital financing? How would you differentiate between venture capital vs private equity.

Suppose you have a business that requires funding, how can you decide whether venture capital or other forms of investments is good for your business? Well, before you make an investment choice decision, you need to know the difference between each type of investment opportunity available in the market.

Is venture capital investment right for your business?

If your business is a startup or early-stage, what would most interest a venture capital is;

Is the business in the right industry?

Most venture capital firms tend to focus their investments on competitive industries where they have a strong understanding. It would be hard to try and convince a venture capital to invest in a business in an industry they have little to no experience in. 

That is why, it is important to do your research about a particular investor you are interested in approaching for funding, to know whether you suit their investment needs and area of expertise. For instance, your business is in the construction sector and you approach a venture capital who mostly invest in the healthcare sector, how hard do you think it would be to try and convince them to invest in your business?

Does your business have long-term high growth or show proof of high growth potential?

Venture capital tends to favour high growth business opportunities due to the nature of their business model. They most always tend to exit the company after a period of time, usually from four to six years after the initial investment, by initiating a merger, acquisition or initial public offering (IPO). It is important for you to indicate high growth potential for your business, in case you are interested in attracting investments from venture capital firms.

Are you ready to give out equity in your business?

Investment in exchange for equity stake is what interests venture capital investors most. If you need an investment and are ready to issue an equity stake, your business may prove attractive to such investors. However, you need to make sure that you are not disadvantaged by terms of any deal you sign. Due diligence is a necessary undertaking you need to exercise.

How venture capital financing works

Venture capital funding usually comes from institutional investors and high net worth individuals, pooled together by dedicated investment firms. The funds are used to finance a new, growing, or troubled business, in exchange for an equity stake in the business rather than given out as a loan. This they do by, taking into account the risks involved with regards to the company's future profits and cash flow. 

Most venture capital deals involves creation and selling of equity stakes of a business to a few interested equity investors through independent limited partnerships, established by the venture capital firms. Some of these partnerships usually consists of a group of enterprises with similar operations. Venture capital tends to focus on new emerging companies seeking substantial investment funds for the first time. 

Venture capital financing is simply put funding provided to businesses and entrepreneurs at different stages of their growth. A large percentage of venture capital investment funds is usually used for building business growth infrastructure such as manufacturing, marketing, sales and provision of fixed assets and working capital. 

The money is not always long-term with the basics being to invest in a business's balance sheet and infrastructure until it grows in its market valuation, so that it can be sold to a corporation or listed in institutional public-equity markets to provide liquidity. The venture capitalist essentially buys a stake in an entrepreneur’s idea or business, nurtures it, and then exits after a short period of time with the help of an investment banker. 

An aspiring entrepreneur with an idea or a new technology but with few or no hard assets against which to secure debt in the current information age, often has no other financial lending institution to turn to for funding. This is where a venture capital investment or funding comes in handy. It is the most suitable funding option for companies and businesses with large up-front capital requirements, but with no cheaper financing alternatives available in the market. 

How to apply for venture capital funding

Venture capital firms tend to invest large amounts of funds in a few businesses after undertaking a detailed background research. Before approaching a venture capital for funding, you need to;

Prepare and submit a business plan which should include

An executive summary of your business proposal, description of the opportunity, market size and potential, a review on the existing and expected competition, detailed financial projections and details of the company's management.

Information review, analysis and one-on -one meeting

Once the venture capital has undertaken detailed analysis done of your business plan and they find your project meeting their preferences, you will be invited for a one-to-one meeting to discuss the proposal in detail. The outcome of the meeting will decide whether or not the process will move forward to the due diligence stage.

Due diligence process

After the meeting, your business proposal will be moved to the due diligence phase which involves, solving of questions relating to customer references, your product and business strategy evaluations, and management interviews.

Agreement signing and funding

If the due diligence process is successful, you will be offered a term sheet, which is simply a non-binding document outlining the basic terms and conditions of the investment you are agreeing to. The term sheet is usually negotiable and must be agreed upon by all parties involved in the negotiations, after which funds are made available to you upon completion of legal documents and due diligence.

Types of venture capital financing

Venture capital funding are for early stage, expansion, and business acquisition/buyout. The funding process is normally complete after six financing stages corresponding to the duration of your business's growth.

Seed money

This is a low level funding for testing and improving on a new idea.

Start-up

This is given to new businesses seeking funds for marketing and product development expenses.

First-Round

This is provided for manufacturing processes and early sales.

Second-Round

This is for operational costs allocated for early stage businesses selling products, but with no profit.

Third-Round

This is funds for expansion of a new high growth company.

Fourth-Round

This is the final type of financing mainly for initiating a buyout or initial public offering (IPO) process.

Advantages of venture capital


business benefits

They bring a lot of expertise and wealth to the business.

more funds available

They do offer a high amount of equity finance.

Flexible or no funds repayment

Your business does not have to repay the invested funds.

valuable market information

They do provide valuable market information, resources, and technical assistance in addition to capital, to make a company successful.

venture capital

Disadvantages of Venture Capital financing


Loss of business autonomy

You stand to lose the autonomy and control of your business as the investors become part owners.

Lengthy process

The negotiation process is long and quite complicated.

Complex funding terms 

The funding is uncertain in form

No short-term benefits

Only long term benefits can be realized from such type of funding.

Venture capital has four main players: you the entrepreneur who needs funding, investors who want high returns for their investments, investment bankers who need businesses to sell, and the venture capitalists who make money by creating a market for the other three. 

Most venture capital firms protect their investments from risk by investing jointly with other firms. They prefer to have two or three groups involved in most stages of funding. Such relationships provide portfolio diversification which is simply defined as the ability to invest in more deals, per each invested capital. This also minimizes the workload of the venture capital partners by getting other firms involved in assessment of the risks in your business, during the due diligence period and in the management of the deal. 

You need to know which investors to reach out to by doing research and gathering information on the investor's target investment, and asking yourself whether you need to raise equity or convertible debt in your business without wasting time on known dead-ends. Always look for the best funding for your company's stage of growth, with industry expertise and a proven team of investors that have the experience in your chosen industry.

DISCLAIMER

Myhelpfund.com: is a referral and consulting services business. We are not Certified Financial Advisers, U. S. Securities Dealer, Stock Broker or Investment Adviser. We are not business consultants and acting in the capacity of a financial intermediary who provides advice to private individuals on or about business matters. .Please understand that the contemplated transaction(s) is strictly private and in no way relates to the United States securities act of 1933 **(THE”ACT”)* http://sblcfinancing.com/assets/sa33.pdf and does not involve the sale of registered securities. This transaction(s) are private and exempt from the act. Each investor associated in any way, directly or indirectly with myhelpfund.com as a potential funding resource must be an "Accredited Investor" as that term is used in federal and state securities laws. Myhelpfund.com provides a service through which clients and investors/lenders may identify each other but makes no actual or implied representations concerning the availability of any potential funding or funding resource. Myhelpfund.com neither effects nor attempts to affect any funding or business relationship between clients and any associated in any way, directly or indirectly investor or lender, and nothing contained in these services offering material should be construed as an offer to sell or the solicitation of an offer to purchase a security. Clients and Investors/Lenders associated in any way, directly or indirectly with myhelpfund.com are solely responsible for compliance of such federal, state, tax or local laws which may apply between them in any funding transaction and (clients) of myhelpfund.com are solely responsible to verify all funding contacts credentials by doing due diligence themselves. myhelpfund.com is not responsible for any problems or conflicts between clients of myhelpfund.com and any funding contacts. Myhelpfund.com does not provide legal, financial or tax advice of any kind. If you have any questions with respect to legal, financial or tax matters relevant to your interactions with myhelpfund.com funding contacts/clients, you should consult a professional adviser. Most early-stage businesses and many other growth-focused businesses fail, and if you invest in a business as a direct or indirect result of myhelpfund.com it is significantly more likely that you will lose all of your invested capital than you will see any return of capital or a profit. You should only invest in businesses that you can afford to lose without altering your standard of living. Myhelpfund.com receives compensation of fees charged on funding that has been accepted and received by the clients. All up front fees paid to our referral partners through their website or by other means are subject to their own terms and myhelpfund.com shall not be held liable for the same. All clients' information and funding transactions positive or negative are held in complete confidentiality and no information will ever be shared outside of our funding network or sold and no clients will ever be used as a reference or referral to any future potential funding seekers considering joining myhelpfund.com.

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