Venture Capital

Financial Dictionary -> Investing -> Venture Capital

Venture capital is critical to small business owners who wish to expand their businesses or to those who plan to start a small business. The small business owner must have more than the desire to build a business. In order to attract venture capitalists that are willing to invest, he must convince them that he has an idea, or a business, that has the potential for financial success. Usually the first place to start when raising venture capital is with a business plan. Once this is done, you'll have something in-hand to present to potential investors that will help them to decide if investing in your business is a good opportunity for them.

Usually venture capital is paid in cash in exchange for shares of stock in the company. It can also be known as private equity capital in that investments may come from individuals or institutions that have been joined together by investment firms. These investors only invest in companies that have shown a potential for high growth.

Newer small business owners find venture capital attractive, especially since their companies are often too small to raise the capital they need to forge ahead financially. Often they haven't been in business long enough to qualify for the bank loans they need.

Investing in small businesses is a high risk for venture capitalists. Because of this, they expect to have some control over the company's decisions that they invest in. In this way, the business owner gives up some control in exchange for financial reward.

Generally, venture capital funds have a fixed life of ten years. However, there are possibilities of extending financing. Often it lasts 3-5 years. Before seeking out venture capital, keep in mind that it's not suitable for everyone. As a small business owner, you need to be sure your company is financially stable, has a detailed business plan to present to potential investors, and has exceptionally high growth potential.

Depending on what stage of development the company is in will determine what type of investment venture capitalists will consider. It may be 'seed money' for the early stage of a company that needs financing to get a new idea in development or start-up costs for marketing expenses. Then there may be a need for manufacturing expenses, working capital, expansion money or financing to help the company go public.

Venture capital is not for everyone and the savvy business owner will investigate his options thoroughly before choosing this or any other route for financing.