Venture capital is a specific term that refers to the funding received from a venture capitalist. These are professional serial investors and can be individuals or part of a corporation. Often venture capitalists have a niche based on the nature and/or size and/or growth stage of the company. You’ll likely see many proposals in front of you (sometimes hundreds a month), be interested in some, and invest in even fewer. Around 1-3% of all deals submitted to a venture capitalist are funded. So with numbers that low, you clearly have to be impressive.
Growth is typically associated with accessing and maintaining cash while maximizing profitable trades. People often see venture capital as the magic bullet to fix everything, but it’s not. Owners must have a strong drive to grow and a willingness to relinquish some ownership or control. For many, the desire not to lose control is ill-suited to venture capital. (Finding this out early can save yourself a lot of headaches).
Remember, it’s not just about the money. From a business owner’s perspective, there is money and smart money. Smart money means that it comes with expertise, advice and often contacts and new sales opportunities. This helps the owner and investors to grow the business.
Venture capital is just one way to fund a business, and in fact it’s one of the least common but one of the most talked about. It may or may not be the right option for you (talking to a business advisor can help you decide what’s the right path for you).
Here are a few other options to consider.
your own money – Many businesses are funded from the owner’s own savings or from real estate equity. This is often the most easily accessible money. Often an investor would like to see some of the owner’s capital in the company (“skin in the game”) before considering an investment.
private equity – Private equity and venture capital are almost the same thing, but with a slightly different flavor. Venture capital is more the term used for an early stage company and private equity for later stage financing for further growth. There are specialists in each field and you will find different companies with their own criteria.
FFF – Family, friends and fools. The closer to the business and often inexperienced investors. This type of money can come with more emotional baggage and intervention (as opposed to help) from its providers, but it may be the quickest route to smaller amounts of capital. Often several investors will raise the required total amount.
Angel Investor * inside – The main business angels differ from venture capitalists in their motives and level of involvement. Angels are often more involved in the business and provide ongoing mentoring and advice based on their experience in a specific industry. This is why bringing angels and owners together is important. There are considerable, easily locatable networks of angels. Pitching to them is no less challenging than pitching to a venture capitalist, as they still review hundreds of proposals and only accept a handful. Often the exit strategy requirements are different for an angel and they are happy with a slightly longer term investment (let’s say 5-7 years versus 3-4 years for a venture capitalist).
bootstrapping – Organic growth by reinvesting profits. No external capital injected.
banks – Banks lend money but care more about your wealth than your business. Expect to personally guarantee everything.
leases – This can be a way to finance certain purchases that allow for expansion. They are usually leased through assets and secured by those assets. It is often possible to lease special equipment that a bank would not lend.
Merger/Acquisition Strategy – You can try to be acquired or to be acquired. A merger usually has a stronger and a weaker partner. Combining the resources of two or more companies can be a path to growth – and when done with a company in the same industry it can make a lot of sense – at least on paper. Many mergers suffer from cultural differences and unforeseen resentments that can erase the benefits.
inventory financing – specialized lenders lend money against inventory you own. This may be more expensive than a bank, but gives you access to funds you wouldn’t otherwise have.
Accounts receivable financing / factoring – again a specialized area of lending that allows you to tap into a source of money you didn’t know you had.
initial public offering – This is usually a strategy after an initial fundraising and showing that a business is profitable by developing a track record. There are several ways to “listen” in Australia. They are useful for raising larger amounts of money ($50 million and up) as the costs can be quite high ($1 million and up).
MBO (Management Buy Out) – This is more of a later-stage strategy than a startup funding strategy. Essentially, debt is taken on to buy out the owners and investors. It’s often a strategy to regain control from outside investors or when investors are trying to exit the business.
One of the most important things to remember about all of these strategies is that they all require a significant amount of work to make them work – from the way the company is structured to how they deal with employees, suppliers and customers – that need to be studied and nurtured in a way that makes the company attractive as an investment. This process of grooming and derisking can take anywhere from three months to a year. It’s often costly, both in terms of actual costs (consultants, legal advice, accounting advice) and in shifting the owners’ focus from “sticking with the knitting” and making money in the business to a focus on how the business presents itself.