External investment is an inevitable part of a growing business. Working capital is different from profit. Even if your business is generating profit, it may still need capital funding in order to realise its full potential. There are various sources of funding out of which venture capital funding is one of the most widely acclaimed. Here is all you need to know about VC funding.
Who are Venture Capitalists?
People who invest capital in a promising venture are called venture capitalists. Venture capital can either come from a single investor or from a group of institutional investors and high net worth individuals who pool their resources together via dedicated investment firms.
What is Venture Capital funding?
Venture Capital funding is an external investment done in a startup or a small business that has potential to grow. With the right financial help, when these businesses grow, the venture capitalist enjoys massive returns on investment. Keeping the return on investment aside, VC funding can make a huge difference in the growth span of the business.
A correct business plan, in most cases, includes external finance options to fill the financial gap and ensure smooth business growth. Not only does VC funding add to the critical financial resources but the business expertise of the experts ready to help with their connections, business knowledge, and improvised decision-making, also helps the business.
When should you opt for a venture capital funding?
- When it’s time to face the real competition
A start-up is usually on its own until it attracts investors. But once that phase is crossed, you’re most likely to enter into the real market full of cut-throat competition. It is important to be able to survive, match and eventually surpass the competition.
- When expansion is the next step forward
Think about VC funding when you’re strategically and process-wise ready for expansion. Business expansion does not happen overnight and more often than not, it goes over-budget. With VC funding, not only will your business be able to expand smoothly but will also receive the benefit of legal, financial, and business expertise of the investors.
- When you need the perfect balance of finances, mentoring, and networking
Venture capital investments don’t just bring a good amount of capital with them but also the expertise and knowledge of the investors. This guidance can be extremely beneficial in making further advancements in business. Irrespective of the amount of financing, the biggest advantage of VC funding is the crucial networking. With wealthy and influential investors believing in your business and promoting it, your business in no time will become the next big thing in the business circuit.
How does VC funding Criteria work?
Mostly, investment capitalist firms are large entities such as the pension funds, insurance companies, and financial firms. Together they put a small amount of their capital in a promising business. The expected return in future is somewhere around 25-30% per year over the total lifetime of the investment made.
The investment criteria of these VC entities with respect to the firm is largely based on the uniqueness and feasibility of the business idea, the track record of the company, and their confidence in the company leadership. But more than anything else, it depends on the industry.
VC funding depends a lot on the nature of the business and the industry trends. Usually, Venture capitalists are more inclined towards funding businesses pertaining to growing industries as the overall market condition also favors them. They focus on the middle part of the characteristic S-curve of the industry. Avoiding both, the early and the later stages, they focus on the middle stage i.e. the growing stage of the industry and if a promising business falls under this category, there are higher chances of venture capitalists funding it.
Exit Options from VC funding
Once your business achieves the envisioned stage, there are various options to take an exit from VC funding such as promoter buyback options, mergers and acquisitions, and introducing IPO. Sale to another strategic investor is also an exit route from VC funding.
VC funding is a great option to expand business with a smooth financial flow and an effective business networking but it also costs the complete control and autonomy of the founder. For investors too, it possesses a risk that the business may or may not perform as expected. If the business investment fails, they lose all their money and the possibility of future profit as well.