Venture Capital Funding
Venture funds are a viable way for entrepreneurs to finance aggressive growth strategies. Before you pull the trigger, you need to understand what distinguishes venture capitalists from strategic investors and traditional lenders.
Few entrepreneurs would argue that it's becoming more difficult to secure funding for growth initiatives.
According to some estimates, more than 60% of commercial loan applications for growth strategies are denied each month.
The odds of securing capital from venture funds and other forms of investment are even more slim. But if your company's growth strategy is a good fit with the venture fund's objectives, you could tap into a substantial amount of growth capital, not to mention the expertise of seasoned industry veterans.
By gaining a proper understanding of venture funds (compared to other funding mechanisms), you give your company a leg up in the funding process. Here's what you need to know . . .
- Focus. Traditional lenders finance businesses from a range of industries. Likewise, strategic investors situated in other industries may be willing to partner with your company, provided they gain a strategic advantage by doing so. Venture funds, on the other hand, tend to restrict their investment activities to specific industries and sectors. In fact, many venture funds very narrowly define the types of businesses they are willing to fund.
- Outcomes. Every investment scenario carries a set of desired outcomes. Strategic investors may take an equity position, but it is assumed that they will be willing to step aside once the goals are achieved. Traditional lenders don't take an equity position; they expect the loan to be repaid according to a schedule that includes both interest and principal. Like strategic investors, venture funds are equity investors. But the difference is that venture funds are extremely specific about the outcomes they hope to achieve -- in most cases, their exit strategy will be an IPO or an acquisition.
- Control. Traditional commercial lenders and venture funds occupy opposite sides of the control spectrum. In commercial lending, the bank's involvement in your business will be minimal. As long as you make your payments in a timely manner, the bank will limit their oversight to the receipt of annual financial statements. But when you receive venture funds, expect the venture capital management team to be integrally involved in your business. In addition to offering insights and guidance, venture funding requires giving your investor(s) a certain amount of control over the business, often in the form of board representation.
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Additional Resources for Entrepreneurs
Have you worked with venture funds or are you in the process of reaching out to VC funds to get money? We welcome your observations and advice regarding venture funds.