Venture Capital Fills a Critical Financing Gap: Venture Capitalists are Willing to Take Risks that Lenders Will Not

Innovative businesses with quick and high growth potential are the ideal candidates for venture capital funding. A detailed business plan would be essential, however.

Venture capital investors provide private equity capital (cash in return for shares in your company) if they judge that a business has fast growth potential. The funding is typically provided during the early stages of the business. If the growth potential is realized, the investors will be able to sell their shares at much higher prices and obtain high returns.

Venture Capital Funding is Costly

Venture capitalists take up risks that more conservative fund-providers, such as ordinary shareholders and banks, are unwilling to accept. Banks typically look for a record of past successful business performance. New entrepreneurs do not have such a business record and will not typically be able to satisfy bankers.

In return for the risk-taking, venture capital companies look for high levels of returns like 40% per annum. If entrepreneurs had been able to obtain needed funds from normal sources, these high returns would have accrued to them.

New entrepreneurs can seek normal types of funding to maximize their returns. For example, small business support agencies might be willing to provide repayment guarantees to banks.

Venture Capital Can Mean Loss of Full Control over the Business

Venture capital firms do not just provide equity funds and then stand by. Typically they will have management partners with business management expertise and domain specialists with specific industry expertise. With the help of these specialists, they will exercise some degree of managerial and technical control over the funded business.

This can be a good thing because new entrepreneurs, particularly technical entrepreneurs, might not have the needed business expertise to exploit the full business potential.

Who are the Venture Capitalists?

Venture capitalists can be institutional investors seeking high returns on the funds they deploy, or high net worth individuals (called business angels) looking for worthwhile investment opportunities.

There are industry associations for venture capital investors and new entrepreneurs might be able to find an investor through them. In the USA, National Venture Capital Association is such a body. US government also licenses Small Business Investment Companies (SBICs) to provide venture capital support to small businesses.

Can all Entrepreneurs Expect Venture Capital Funding?

Venture capitalists are highly selective and accept only one proposal out of hundreds that they receive. Entrepreneurs planning to approach this source need to develop their business ideas into detailed and practical business plans in advance.

Venture investors expect to harvest their investments at high profits within a period of three to seven years. Businesses with the potential to become profitable and grow into a much larger business (able to go for an IPO, for example) during this short period stand a better chance.

Venture capital is a source of funding for new entrepreneurs with a superb business idea. These entrepreneurs might find it impossible to raise money from conventional (or informal) sources. They can get both funding and managerial help from venture capital firms.

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