Raising venture capital is considered one of the best ways for business growth. This is because inventions and innovations drive the economy, and the venture capital industry plays an important role in different stages of innovation in a company.
Luckily, the venture industry receives a lot of support from investors. In 2021, despite the impact of the COVID-19 pandemic, venture capital activity saw deals exceed $300 billion, doubling the 2020 record. This is according to a report produced by PitchBook-NVCA Venture Monitor.
Money from venture capitalists helps build the infrastructure necessary for business growth, such as manufacturing, sales, and marketing. It is also invested into the company's balance sheet to provide working capital and afford fixed assets.
The financing given by well-off investors, financial institutions, and investment banks is done in return for equity or a say in company decisions. It is worth noting that venture capital support is not always monetary and can be offered as managerial or technical expertise.
Since startups are risky, banks limit their support to assets against which they can secure a debt. Unfortunately, most businesses don't have enough assets to warrant good financial support. Therefore, venture capitalists fill the void by providing funds for businesses. However, venture capitalists may invest in already-established businesses rather than newer ones, especially in turbulent economic times.
Venture capital should not be confused with private equity. Although both involve funding businesses, private equity firms mainly buy already established companies that are failing. These companies' operations are then streamlined to increase revenue. The private equity firms may buy 100 percent ownership of a company they invest in. On the other hand, venture capitalists can take their exit after a loss or gain.
Business owners can find venture capital firms through referrals from financial professionals such as banks, CPAs, and financial advisors. Before engaging an investor, business owners must understand that their main interest is in the value of a business and the return on investment. Hence, before a business seeks venture funds, it should conduct a valuation and realistic financial projections to estimate viability.
It is also crucial to determine the value needed based on the capital that the business will use effectively, the stage of the business, and the control level to give to investors. The higher the investment, the higher the stake in a company that an investor will seek. Failing to establish this early enough may lead to investors declining or withdrawing their support.
Business owners should not neglect to grow their businesses using other means, as raising capital can take months to secure. Focusing on procuring venture capital may have adverse effects on a business, and worse getting a rejection may result in a failed business. For instance, if an investor declines support, it may lead to a business taking huge cost-cutting measures such as reducing pay or letting go of employees. Therefore, although there are recommended steps to follow when raising capital venture, a business owner must understand the best practices for successful fundraising.
