The ABCs of Venture Capital

If your business is in a fast growing industry with a large market potential, you may just catch the eye of an investor.

Venture capitalists typically invest in young companies they anticipate will be sold to the public, or to a larger company, at a high rate of return. If your business is in a fast growing industry with a large market potential, you may just catch the eye of an investor.

Read on to find out more about this form of growth financing and whether it’s right for your business.

What is venture capital financing?

Venture capital is a form of equity financing that differs from its close cousin, angel investment, in several ways.

Like angel investors, venture capitalists (VCs) provide funding in exchange for a share in your company. Unlike angel investors, VCs invest on a much larger scale – typically millions of dollars.

For this reason, venture capitalists tend to be more risk averse than angels. They rarely invest in an untested idea, preferring businesses that can demonstrate rapid, consistent growth and guarantee a worthwhile return. As shareholders, venture capitalists earn a portion of annual revenue – but the real profit isn't made until the company is sold.

Is your company a good prospect?

Be warned: securing venture capital funding takes time and energy, and very few small businesses win the kind of investment they want.

Before you start researching venture capital firms, you should know the type of company investors consider a good risk. Your business should:

  • Be in a fast growing industry (for example, information technology or biotechnology).
  • Be part of a large market (for instance, one that generates $1 billion or more in revenue).
  • Poised to take first or second place in that market.
  • Have a solid and up to date business plan for continued sales growth.
  • Be supported by a proven management team that can generate high revenue.
  • Be able to bring in investment returns of 20% to 30% each year.

In addition to these pre-qualifying questions, ask yourself how comfortable you are with giving up control of your company. Accepting venture capital funding means you'll be selling a portion of your business, which is a serious consideration for many business owners.

How to find the right investor

If you're eager to seek out venture capital funding, start by researching firms that invest in your type of business or industry. One of the benefits of working with a venture capitalist is getting invaluable advice from someone who knows how to quickly grow a highly profitable company in your industry.

The next step is to find a fellow business owner or financial professional who can approach a VC. A warm introduction will go a long way to building trust and minimizing a sense of risk for your investor.

If you believe in your company's multi-million dollar potential, know that venture capital deals take time. Don't be put off in the beginning by how long it takes to find the right investor and opportunity. It's worth it in the long run to be just as particular about an interested investor as they are about your company. That way, you can go into any financial deal confident you're making a good decision in the best interests of your company.

Disclaimer: This article is intended to provide general information only and should not be considered as business, legal or financial advice. Consult with a qualified specialist to obtain assistance specific to your particular business. Links to any websites are provided solely for your convenience. Scotiabank is not responsible for the accuracy, reliability or the content of such websites.

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