By: Seomul Evans
Submitted: 2009-02-28 13:55:09 | Word Count: 649
Are you a startup company that needs funds to launch? Are you an established company in need of funds for expansion? Are you running a company stricken with huge credit lines and in dire need of funds? Whatever the reason is that you need funds for; venture capital provides you the solution to all your financial needs.
How Venture Capital Works
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Investors release funds to those companies that they feel have enough potential to be successful. Venture capital firms are managed by different individuals from various fields and sometimes by the venture capitalists themselves.
Now, we know that venture capitalists release funds to companies that are in need of money to develop and advertise. What do the venture capitalists get in return for this? They get a share of the equity and a part of the ownership. Sometimes they will even settle for seats on the board of directors. It all depends on how much you need and how they give you as well as how much they want in return.
Venture capitalists are not just the ones who give out money. That is not the sole reason though for companies to approach them. It is their line of contacts as well as the reputation that comes with it that are more attractive to companies. While money is important, it is not everything in business. Your contacts; who you know are just as important a factor. If you are associated with the right venture capital firm, which has a very good address book of associates and decent network then your work is done. You have got a great deal right there itself.
The venture capitalists just do not barge into any and every business that asks for their capital. They do their homework too and they do comply with their ground rules.
Broadly, there are three things that they take into consideration.
1. First is the value system of the company who seeks funds from them. This makes them ascertain how strong the morals are and would be able to assess the core strength of the company. If this is satisfactory then the company can weather any storm. So this becomes very relevant.
2. Second is the rate of return of money invested. This is for obvious reasons. No free lunches here. You got to know how much you would get if you are investing something. This will be checked out and if satisfied then there will be confidence in the minds of the venture capitalists to invest.
3. Third, they would look for an exit option. Business is a gamble at the end of the day. You got to know when to jump ship. You got to make the provisions at the start itself. They would look for one and if they know they can sneak out unharmed when the ground slips under the feet, then they will give a confident okay to the project.
There are various jargons that are used in case of venture capital investments. There is sweat equity, which as the name suggests is all about the sweat investment. The lawyers and other professional just work without getting paid and invest with their sweat. They do this only if they have faith in the firm. Later on for their sweat investment would expect to be rewarded with huge contracts and other lucrative services.
If you need funds to just do the groundwork and develop a blueprint of the business and the venture capitalists then it is called pre used funding. If the funds are given to develop a model product and recruit a management group then it is called self funding.
In case, the funds are given to aid with the completion of product and the starting of marketing then it is called startup funding.
There are development funding, Mezzanine funding, expansion funding, mergers and acquisitions and a lot more jargons that is associated with venture capital.
