Only you can answer the funding question, but when you consider venture capital has helped businesses such as Amazon, Google, and Starbucks, you realize it is a powerful financing tool that isn’t a new as some might think. What is venture capital, and how might it help you? Keep reading to learn more about VC, as it’s often called, and how it works. Knowledge is power, so arm yourself with the information you need to make an informed decision about VC and your business.
Generating financing for businesses for about 50 years, financial software giant Intuit explains venture capital is “a pool of funds managed by a firm or corporation.” In some cases, however, the funds are managed by a wealthy individual. But don’t get venture capital confused with angel investing. An angel investor is usually one person who believes in your business and gives you the cash to start it up or move it forward. Venture capital, as explained above, is usually multiple investors.
Chris Sacca is the founder and CEO of LOWERCASE Capital, a venture capital investment company that has provided seed money to – are you ready – Instagram, Kickstarter, Twilio, Twitter, and Uber among other businesses. Sacca’s company saw the vision these companies had, and he invested in them to help them grow into the giants they are today. Be completely honest, where would the President of the United States be without Twitter, and you know you’ve used Uber after a night on the town.
To use venture capital to turn you into the next Instagram, however, you must keep in mind this funding gives you traction in your niche after you’ve already established yourself. Venture capitalists slip the crampons on your hiking boots so you can traverse up the icy slope on which you are currently stuck. This is another difference between venture capital and angel investing. An angel investor is there for you when you start your business; a venture capitalist is there to give you a push once you’ve established market traction.
As such, if you are looking for funds for your next great idea, you may do better to seek out angel investing. This being said, you can also approach VC or other alternative financing such as crowdfunding or Small Business Administration loans. If you have a solid business plan and product or service, a venture capitalist might be interested. In fact, in an article published in Insights by Stanford Business, Ilya A. Strebulaev and Will Gornall report that many businesses use VC funding for research and development.
The Next Big Thing
This article has dropped the names of some major businesses that have benefited from VC funding and it has done so for a reason. An angel investor may invest in a small mom-and-pop shop if the person believes in the business owner; a VC investor wants to catapult a business into its next huge growth phase. It wants to take a small coffee shop and turn it into Starbucks, so make certain you can pitch that monumental growth and back it up before you approach a VC funding company.
Potential VC investors want to know your current revenue and future projections. They also want to know how your company plans to grow and by how many customers. Intuit explains, “You have to be able to demonstrate that your users, revenue, or both are growing and will continue to grow at a rate that requires a large investment to maintain,” otherwise a VC company may not be interested in giving you the cash you need to put on the crampons.
Getting to Know You
Because the VC investor is banking on you turning your company into a national or global conglomerate, relationships are key. You can approach an angel investor, open up a crowdfunding campaign, or even apply for an SBA loan without a previous relationships but networking with VC investors and companies is crucial before you ask them to write the check. Few, if any, will turn over funds until they know you, until you have established your presence in VC circles, so connect those in the VC industry and begin to build relationships before you pitch your growth projections.
Finally, it’s important to keep in mind that both angel investors and venture capitalists will want a piece of the pie in exchange for their investment. An angel investor may ask for aportion of your company’s returns, but a venture capitalist will become a hands-on manager. This is quite beneficial if you can project your growth but aren’t certain how to get there, it’s also a reason why VC companies are niche-oriented. They are experts in their fields and push businesses they believe to their next level.
Only you can determine if VC financing is beneficial to your business, but chances are it is. If you have a business plan and existing customer base that could potentially turn you into a powerhouse within your niche, a VC investor who also specializes in your niche can help you get there. Don’t discount this alternate funding as a viable source of investment income.