|
Startup Venture Capital 101
Startup capital is the capital that an
entrepreneur needs to pay the necessary items needed when starting a business, like business space,
equipment, supplies, and employee’s paychecks.
Meanwhile, venture capital is the fund that a venture capital (VC) firm or an angel investor
would provide to a starting or trouble-laden business.
Unlike loans, venture capital is invested in the business
rather than being returned. With bank loans, for example, the money borrowed should be
returned within a specific period of time along with interests and other fees.
But with venture capital, the money is provided in exchange of equity in the
business. The venture capital firm would take part in the business, they could have one of
their own to be a member of the board of directors.
Aside from having a portion of the company, the VC would also have the right in knowing the
operation of the business. Their opinions would matter especially when making decisions in
the company. VCs rarely concern themselves with the daily operation of the business unless
the life of the company or business is being threatened. Aside from this, the VCs’ opinion would
also matter and they could prohibit the portfolio company to close down.
The difference between a venture capital firm and an angel investor is simple. An angel
investor does not operate like a firm and more of a wealthy individual who invests in startup
businesses. An angel investor usually does the transaction informally and privately. An
VC firm could be a group of wealthy investors or an affiliate of a bank or an insurance
company.
Another difference between an angel investor and a VC is the amount that they could give to the
starting entrepreneur. VCs would normally provide funding not less than $250,000. Angel
investors on the other hand could give a smaller amount than VCs but still in exchange of
equity.
Not all venture capital firms invest on startup businesses. There are different types of capital
which depends on the different stages of the business. For example, the seed capital would be
mainly for research or planning stage. Startup capital would be for the procurement of
initial needs. The mezzanine capital would be fore expansion and there are also later-stage
capital or funding which would be for transitional stages in the company. So before you bring you
business plan to a venture capital firm, make sure that they are indeed for startup businesses.
VCs do not just invest on the next business venture. Currently, because of economic crisis
affecting us, venture capital firms would rarely invest in other business but rather concentrate on
their existing portfolio companies and make sure that they are running well.
But even if we are not in an economic recession, VCs are still very selective with their
investments. They would have to consider the nature of the field where your business will be
a part of, geographic or location preferences, the product or the service’s marketability,
strong management and competition. Aside from that VCs are known to accept those businesses
that would enable them to profit big time within 3 to 10 years, other within 5 to 7 years.
Application for a startup capital would require the entrepreneur to submit a comprehensive and
complete business plan. Some VCs would even require the list and credentials of the
management team and financial projections. The entrepreneur just needs to clarify with the
VCs about the additional requirements.
To exit out of a business, the VCs would sell their share of the company through an initial
public offering or IPO to the company. The company or the business could buy the stocks
within the next 7 years. They could also exit through a merger with another company, where the VCs
would receive payment for their stocks. VCs could also exchange the equity for money and the
management teams gets incentives from the equity.
We would need to understand capital venture firms and their startup capital investment. In this
way, simple, starting and young entrepreneurs could start their business an know their
options. If you have decided that VCs are the right place to go for your business venture,
then go ahead and present your plan. It could be start of your success.
|
