Entrepreneurs with a billion-dollar business idea but not enough capital to get it off the ground often turn to venture capitalists. Whether you need investment funds to develop a prototype, or you’re up and running and simply need a cash injection to scale up, venture capital could be your solution.
What is venture capital?
Venture capital is a type of funding provided to start ups and small businesses that have long-term growth potential. It’s typically provided by financial institutions or venture capital firms that specialise in high-risk financial portfolios, or private investors known as venture capitalists.
Venture capitalists plan to profit from their investment, meaning they’ll expect equity or an ownership stake in your company in exchange for the funding they provide. As such, venture capital is different to a loan that you repay to the lender with interest. Rather, venture capitalists purchase a piece of your company and profit when you begin to return dividends, sell the business, or carry out an initial public offering (IPO).
As a part owner, they will sometimes have a say in how your business is run. Venture capital tends to be delivered in three distinct stages: seed, early stage, and growth. Seed capital is used to help prove your concept, while early stage capital is used to get your product or service to market, and growth stage capital is provided to companies ready to expand into new markets.
How is venture capital different to private equity?
Venture capitalists tend to invest in developing start ups showing great promise, while private equity firms are usually more interested in mature companies that are inefficient or under performing. Private equity firms tend to buy the companies they invest in outright, meaning they are 100% in control. This allows them to streamline operations, increase revenue, and profit from improved performance as a result.
Venture capitalists, on the other hand, usually have a much lower stake overall, and often spread their investments across multiple businesses to avoid a significant loss if one were to fail.
How to raise venture capital
If your business is seeking venture capital, you can send your business plan to a firm or venture capitalist. If they’re interested, the firm or individual will then conduct a thorough analysis of your business model and products. They might also conduct an investigation of your company’s operating history and your professional background.
If you’re successful, capital is typically provided in rounds that are tied to performance milestones. These will need to be reached before the next round of funding is released. There are many venture capital firms currently operating in Australia that invest in local startups.
Independent firms often work with Australian start ups and some of the big banks have venture capital arms. For example, NAB Ventures invests primarily in technology companies, and CommBank runs Innovation Labs in Sydney, London, and Hong Kong.
Securing venture capital could provide the pathway to success you’ve been looking for. Do your homework to find the right venture capital firm or private investor for your business and your efforts could be richly rewarded.