About Venture Capital Money
In the United States, venture capital firms invested $6.6 billion on 797 projects in 2006 according to PricewaterhouseCoopers. These venture capital funds were distributed to startups making electric vehicles, outdoor clothing and other high-demand products. Entrepreneurs looking to turn their ideas into reality should look at venture capital money to get started quickly. As the economy contracts and lending institutions cast a leery eye to new businesses, venture capital firms may be the best option for startup owners with sound business plans.
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Benefits
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For small business owners, the primary benefits of venture capital money are quick funding and industry-specific expertise. Venture capital firms assign associates as well as entrepreneurs-in-residence to projects that are deemed profitable. The quick turnaround on venture capital money differs from the slow grind of applying for business loans and seeking investors on the open market. The entrepreneur-in-residence at a venture capital firm is an expert on a specific industry or niche that can advise business owners receiving venture capital money. For example, an educational software company may be assigned an entrepreneur-in-residence who is a former teacher and consultant at the K-8 level.
Features
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In the agreement between a startup business and a venture capital firm, the latter party includes several methods for the startup to repay venture capital money. Venture capitalists typically assess management fees on an annual basis to cover travel costs, labor and other resources. The funding agreement also lays out the percentage of a company's profits that are used as dividends on the venture capitalist's investment. These agreements may also require startups to accept firm employees as consultants to ensure that funds are used appropriately to ensure the highest return possible.
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Considerations
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Both sides of the venture capital equation should consider the mechanics of startup funding before getting in too deep. Venture capitalists should stagger their funds to account for the 10-year limit on venture capital money. These firms can open funds on a quarterly or yearly basis to maintain fluidity in their investments without funding gaps. Small businesses seeking venture capital money should understand that investors are not created equal. A startup owner who has developed a solar energy conversion kit for cars should look for alternative energy investors rather than general firms. In the search for venture capital, an applicant should look to narrow his funding options to industry-specific firms that are familiar with niche technologies.
Function
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Venture capital money is used at various levels of a company's evolution to ensure a smooth transition to the next level. Many startups use these funds to prepare their operations for initial public offerings (IPOs). This early-stage funding may be used to hire additional staff, pay legal fees and improve production capabilities in anticipation of higher consumer interest. A small catering business that has outgrown its single kitchen space may ask for venture capital money to buy a storefront and acquire stoves, vans and other equipment. At the highest level of venture capital funding, businesses are seeking money for advanced research and development to stay ahead in competitive industries like consumer electronics and automotive production.
Size
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Venture capital firms are able to provide hundreds of thousands of dollars in money to startups because of their strict selection process. These firms typically fund less than 1% of startups applying for venture capital money, weeding out bad business ideas and owners without clear visions for their companies. The maximum amount of venture capital money available to a new business is $1 million though most firms opt for lesser amounts in early-stage funding. The latest trend in venture funding is the creation of venture capital accounts capable of doling out less than $250,000. Startups with low overhead costs and barriers to entry into their markets can ask for loan amounts in $10,000 intervals rather than $100,000 chunks.
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Resources
- Photo Credit Photo by Steve Wampler (Flickr)
