Venture capital is an ideal formula funding for startups and innovative companies that have reached the level of maturity required to address an expansion process and requiring significant investment. We tell you about what is the venture capital, the difference between seed capital and development capital, the characteristics, advantages and disadvantages of venture capital as a source of funding and a series of tips to find and convince the managers of this type of funding.
Resorting to venture capital as a way of financing is a difficult but very appropriate choice for companies with high growth potential that need significant amounts of money to finance its expansion.
Traditionally, venture capital funds have been reserved to already established companies, with a solid and proven experience in the market. In recent years however venture capital it is showing increasingly more interested in startups and innovative projects, which usually have already received the support of family and friends. That is, the venture capital would be the third step on the road of private financing.
What is venture capital funds
It is managed by specialized corporations that invest funds from its own resources in the temporary financing of SMEs, often innovative, in order to sell its stake after a few years, obtaining a considerable benefit.
You can find two main types of private equity funds according to the profile of projects which are intended:
- Seed capital aimed at companies in their initial stage or first stage to finance its consolidation. Seed capital funds are therefore the most venture capital funds interested in investing in startups and entrepreneurs.
- Capital growth or development capital targets already established to finance expansion and internationalization of companies. Oriented projects that have proved their viability on the market for at least one or two years and they need capital to finance expansion, consolidation and internationalization.
Venture capital funds are therefore highly professional private investors and consequently demanding projects that support, which asked enough maturity and growth potential, plus a participation in decision-making.
Characteristics of venture capital funds
The salient features of this type of funding are:
- Professionally managed funds of others, so they are quite strict when enforcing business plans and business expansion plans.
- Many are made up exclusively of companies that have come together exclusively private capital, though other driven by large companies, banks and authorities in recent years have led more towards the form of accelerator technology.
- Your support can realize through direct share ownership or through a shareholder loan, which will guarantee the project itself.
- Their contributions often exceed 500,000 euro, except for public venture capital, often making contributions from 150.000 euro.
- Its vocation of permanence is temporary: to sell their share within 4-7 years and more than able to recover the invested money. The minimum return they hope to achieve at the time of sale is 30%, although its aim is to at least double the amount invested.
- They seek therefore scalable projects that allow exponential growth of benefits and are led by convincing entrepreneurs.
- Often they involved facilitating their contacts and management skills, which can be of significant support to novice entrepreneurs.
- Assess projects based on the business plan and several interviews with promoter/entrepreneurial team.
Advantages of venture capital
- The project or the company and its management team are the guarantee, i.e. no endorsement is required.
- Venture capital funds provide access to considerable amounts of money (from half a million to several million euro from 150,000 euro or in the case of public venture capital) to provide the guarantees necessary to undertake an expansion financial stability.
- Support of organizations with extensive experience in business, generally also specialized in a particular sector, reinforcing to the company both in terms of contacts and knowledge and management experience.
- The support of a venture capital fund to a project report will not only financing, but also prestige and credibility, having passed the filter which means getting support from a fund of this type.
- Private equity funds usually require presence in the board of directors and the strategic decisions of the company, which can condition greatly. They do not usually get involved in the daily management but it is clear that this type of fund is a loss of freedom for the entrepreneur.
- As it is the case with business angels, given the high investment risk, usually require a high return on investment and gains in the medium term, which can not always be secure. To do so may require signing contracts that can sometimes prioritize their interest on the funded project.
- Its permanent is short and clearly temporary, which can sometimes conflict with the interests of the promoter group.
- Preference for capital development projects compared to seed capital, where the risk is higher. For this reason it is easier to find bets the seed capital funds between driven or participated from the administration that function in a manner completely private.
- The output of the venture capital fund sometimes creates friction…