Venture Capitalists, Are They A Good Idea For A New Company?

You have your great business idea but it is going to take a load of money to get started so what are your options

? Well Venture Capitalists are one source of funding, but you need to understand what venture funding might do to your company.

Venture capitalists invest on start up companies with big potential and high growth. They expect to collect their money, with a high return for risk, within three to five years. The normal way they do this is by taking your company to the stock market. A steep learning curve for any new company.

Venture capitalists usually invest in high technology companies or new product companies that show great promise in the near future.

In exchange for venture capital, which can often be sizable, a venture capitalist will get a share of your company and have a major say on the company's decisions. There will be a great deal of pressure to grow the company quickly but you will be receiving expert advice and the connections of a venture capitalist that has successfully done this many times before.

A person who has always dreamt of owning their own business and making their own decisions may find this a little uncomfortable.

There are some venture capitalists that specialise in providing financial services to start up companies with mostly an idea and a business plan in their hands. Venture capitalists are willing to make risky investments on businesses that banks loans and capital markets are afraid to make. They do, however expect to make returns that sometimes will make your eyes water.

Venture capitalists have the ability to pool in a large amount of capital as well as provide you with the benefit of their experience and industry contacts. Some venture capitalists use their own money, many bring in funds from pension funds, other industrialists and investors.

The idea of large injections of cash, combined with business skills may seem a very good idea for a starting company but there is downside to all of this. In the business world nothing is free and general partners require 20% upwards of the net profit of the company. They will also need a significant management fee every year. This is on top of owning a large portion of your company.

Despite these downsides it is not that easy to attract venture capitalists. They often have strict requirements. They will not invest on companies that don't have proof of their technology, full patents and the potential to grow extremely quickly. They will also investigate the current directors of the company to ensure that they are up to the job!

Usually 999 business plans get rejected out of 1,000. They can reject you for a lot of things that may even seem trivial at the time, but that is their greater experience in the amount of risk they will take for the return that they expect.

Before you find yourself a venture capitalist make sure you are aware of their impact in your company. You should always look ten steps ahead. Can you work under that kind of pressure? Will you be able to grow your company that quickly? Most importantly, will you be able to survive once the venture capitalist takes their profit and moves on to the next new business?

by: Lee Lister

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