How Does Venture Capital Work?
Every new business endeavor requires money to get started. Whether it is the initial costs of renting an office location or purchasing a space for general business purposes, there are always start-up costs necessary to make any entrepreneur’s dream a reality. With numerous expenses involved in the building of a new business, there are a variety of ways that entrepreneurs may choose to fund their idea.
How does a new business get financed?
Personal savings is one of the first methods of payment that most entrepreneurs will consider on the path to proprietorship. You can fund the business all on your own if you happen to have enough accrued in your personal savings. Another source commonly utilized is the equity on one’s home. Acquiring a second mortgage is often a go to for entrepreneur’s seeking funds for their business endeavors.
Other businesses find bootstrapping to be an effective method of financing for their start-up. Bootstrapping simply means that with a very small initial investment, you can get the business started. Once the business has begun, the profits from each sale are used to further grow the business. This can work well for certain industries such as those in the service market where the initial funding costs are relatively low with no employees necessary in the beginning.
Bank loans are another typical method to financing a shiny new business, though these are much more difficult to attain being that they require the authorization of the bank. To be approved for the average bank loan, most start-ups will need to undergo an assessment by the lending institution involved. They will need to deem the venture to be a sound investment prior to lending the sum mutually agreed upon.
What are venture capital firms and funds?
Venture capital firms are often used to fund internet start-ups and other Dot Com companies. However, they are also known to assist in the funding of numerous other areas of industry. One of the most common approaches is for a venture capital firm to open a fund. This fund is simply a pool of cash that the venture capital firm will invest. As the firm gathers money from wealthy individuals and separate companies or pension funds, they accumulate the amount that they wish to invest which is a fixed number.
This fixed number which has been designated for investment will then be spread out to a number of business start-ups. Each firm and fund will have its own investment profile. Every profile will contain vital information such as potential risks and rewards which will be made known to the investors prior to funding.
In most cases, the venture capitalist will invest the entire fund, anticipating that all of the investments made will be liquidated in three to seven years. In other words, the private equity firm will expect each of the companies which have been invested in to either go public by selling shares on a stock exchange or to be acquired or bought by another company. Either way, the money which flows from the sale of stock to the public or a private acquirer allows the venture capitalist to cash out while placing proceeds back into the fund from which they came. With the assistance of a successful private equity firm like that belonging to Efraim Landa, any new business can trust that they will receive all of the support that they may need. Efraim Landa has over 30 years of experience in the medical field developing, marketing and selling a wide range of product lines. As the co-founder, chairperson and CEO for GlucoVista, he has learned how to develop a unique approach to business.
What is the process like for the company being funded?
Initially, the entire process begins when a start-up requires money in order to grow. The transaction starts off with the new business seeking venture capitalists to invest in the company. The founders of the new business or company will create a business plan which will effectively convey what they plan to do and what their expectations are over a period of time. This can include the speed of growth, the total amount they expect to accrue and more.
The very first round of money is referred to as a seed round. This is largely due to its expected growth over time. In a specified period, a business will usually receive three or four rounds of funding before going public or getting acquired.
How is a venture capitalist repaid?
In return for the money that the start-up business receives, they will give the venture capitalist stock in the company as well as some control over decisions the company makes. One example is to allow the venture capitalist firm a seat among the board of directors. This is one of the largest negotiating points discussed with venture capital funding.
Posted on June 13, 2014, in Effi Enterprise, VC Firm, VC investments and tagged Effi Enterprises, entrepreneurs, financing a business, VC Firms, Venture Capital. Bookmark the permalink. Leave a comment.