Venture Capital: The Basics
There are ways to start a business. If you have a great idea that has a big potential, there are ways to access funds for your business. Venture capital funds are one of the sources of seed capital for your start up company.
Venture capitalists invest in start up companies with big potential and high growth. These are usually high technology companies that may lead to high returns in the long run. The downside of this is the venture capitalists get a share of your company and have a say on the company's decisions. A person who has always dreamt of starting up and running their own business may find this a tad uncomfortable.
The low down on Venture capital
There are some venture capitalists that provide financial services to start up companies. These are usually companies that are entirely new, 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.
Companies that they invest in are usually high technology businesses such as computer and electronics. They are also interested in development and research.
Venture capitalists are general partners that offer limited partnership to a company. These general partners are usually made up of executives from a financial firm. They have the ability to pool a large amount of capital. These funds are usually taken from pension, foundations, insurance companies, financial endowments and financial institutions.
This may seem a very good idea for a starting company but there is downside to this. In the business world nothing is free and general partners require 20% of the net profit of the company. They also need a 2% management fee every year.
It's also not easy to attract venture capitalists. They often have strict requirements. They will not invest in companies that don't have proof of their technology. They may agree to meet up with you but that does not mean you're already on good terms. Most of time 999 business plans get rejected out of 1000. They can reject you for a lot of things that may even seem trivial at the moment. The hurdles don't stop there.
General partners may help your company to jumpstart and expand. But they won't just let you make the decisions when they have invested a lot of money in your company.
In some instances this may lead to problems especially when general partners only care about making money for themselves. They may invest in advertising but not in the right places for your customers. Some of them like to spend too much money and the sudden growth is too fast.
Before you find yourself a venture capitalist make sure you are aware of their impact in your company. A venture capital fund may seem convenient at that time but you should always look ten steps ahead. Look for a general partner that will help your company grow not just add weight to their wallets.
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