Starting a business is not an easy task and needs a lot of planning before you can actually give your business idea a viable structure. Same thing applies to managing venture capital to start a business.
There are many stages involved before the actual production starts, like laying down a business plan, setting up the infrastructure, obtaining the resources, availing functional and operational tools etc. and what affects these factors significantly is the financial structure of your business.
Business start-ups often face the problem of raising capital to kick-start their venture. There are numerous options available in the market today that assist entrepreneurs in raising the seeding money for their business such as angel funding, bank loans, IPOs etc. Venture capital is another such term in this context.
What is venture funding
Investors or specialized financial institutions which are willing to put their money in start-ups they perceive have high potential value in the market are known as venture capitalists and the money coming from them is the venture capital. This form of funding is important to the small business start-ups since they do not have enough exposure to the capital markets nor can they raise money through issuing debt.
Wealthy investors, investment banks and other such funding institutions have expertise in supporting these risky ventures. In exchange for their investment, the venture capitalists get equity in these companies and most of the times also have a say in strategic or financial decisions of the company. The rate of returns on their investment is quite high, usually ranging to 15-20% and depends on the growth profile of the company they are funding.
How does venture funding differ from Crowdfunding?
Venture capital and crowdfunding are two different ways to access investment opportunities in the early stages of a business. It is your business structure that determines the size of capital required to sustain it in the market and hence guides you to make a selection between the two options. There are pros and cons associated with each of the funding plans. Here is a select comparison of the two
Young entrepreneurs ready with their business plans are generally not-so- ready to get through the market on their first release. Due to the dynamism of the market it usually takes some time before the new businesses can establish themselves and their products fit the market standards. This gap between production, sales and actual revenue generation is not counted only on a timescale but also on financial grounds.
Funds collected by crowdfunding campaigns cover the expenses for setting the business on a roll. However, venture capitalists having a direct involvement with the company generally support the start-ups during this instability situation by chipping in money. Their experience with such realistic scenarios is often of great help in taking the right strategic move for penetrating the market. This is a healthy environment, not only to keep the business going, but also for encouragement of naïve enthusiasts to struggle through the odds.
- Assistance and Mentoring
Though money are a matter of great significance when we talk of new start-ups, business is not a one-man show. This is because you may come up with innovative ideas and you may structure it down into a business model, but you cannot be an expert in everything.
Starting and running a business takes a lot of hard work and efforts on several fronts, from laying down a business plan to setting goals and objectives, acquiring processes, production, marketing to sales etc. Hiring the services of experts is only going to incur you expenses.
Crowdfunding campaigns raise money, but there are no formal associations with the company. Money comes from people who connect to your ideas and hence contribute to it, either in exchange for some reward or on the offer of getting their money back after a certain period of time along with interest levied on the actual sum.
Venture capitalists are aligned with the business owners in their aim to make significant growth in the market and generate revenue at high rates. Experience and expertise produce long-term, sustainable and profitable business solutions when combined; the same is validated in venture funding scenario.
When there are a number of people involved in a venture, opinions collide leading to unhealthy work culture. This is not advised because unless people working for a cause work together in sync the intended results cannot be achieved. Grievances between people at various levels of an organization ruin the internal structure badly.
People donating money voluntarily in crowdfunding do not seek their preferences being executed. They just support the business idea for they feel the product addresses common man issues and hence, can simplify their lives. On the other hand, venture capitalists want to set the money spending strategy, as per their thoughts and this may clash with what the founder thinks and hence friction between the two.
Venture capitalists are experienced people and hence, they want more transparency and clearness and rigidity of the business plan while negotiating on a project. This is more of a professional affair and often, provides the business owner with an insight of the actual market scenario.
- Business Control
Young entrepreneurs who start the business generally do not tend to part with any share of the organizational control. This comes natural, as you do not want to serve liabilities, in case your business fails.
Crowdfunding is an ideal way for such businessmen for raising capital money. Business owners retain full control over the business processes and set their action plan suited to their primary aim. This is not the case when you receive venture funding. The investor exercises partial control over your business in the form of stakes and hence plays a significant role in deciding company policies and strategies.
How to get venture capital?
Venture investors do not work on shaky plans. You need to prepare well and keep your facts in place to get their attention and the consequent funding. Here are few points to consider in this context.
- Project your idea clearly
- People must feel secure when they put their money at risk and hence, your business idea should be a promising one. What investors seek is the uniqueness of your product and how effectively does it render its services to the society. Make sure you touch the gaps in the market and use it to sell your product. It requires a proper analysis to get the statistics support your idea and confidence to pitch it well.
- Make a value proposition
Venture capitalists have a lot of offers at a time and hence, if your business is just another idea to them, they will simply ignore you. Make it a point to work diligently on your proposition in order to catch attention of the potential investors.
Investors are interested in the bigger picture, like how well will your product do, that customers would be willing to spend some time getting it or if you have a scalable market you are targeting. If the users do not feel the need for your product there is no point funding such a venture.
- The potential market traction
Investors do not fall for wordy propositions. Your product should be able to demonstrate enough market traction, for demand and supply both. You can choose to convince the investors with the use of pilots to display that there are potential customers for your product and that your market presence would be huge.
Venture capitalists are experienced personnel and have a fair idea about the customer buying behaviour and the consequent market response to a new product. You have to show that your product’s value is worth that risk.
- Team up
A single person running a business is very likely to succumb under the pressure of market fluctuations and initial stages of low response rate. However, a team of people, be it young graduates or a mix up of experts from different fields, always perform better when put to an adverse situation.
The decision making is also highly efficient given the opinions of many people well discussed and analyzed. Venture capitalists like to back such offers where they see a team at work, so that they are assured the business will not fall apart in worse scenarios.
How does venture capital benefit the economy?
Venture capitalists target to realize a significant gain by investing in start-ups that pose high growth potential. This inflow of funds maintained by investors keeps the small businesses running in flickering market scenarios. This is a healthy scenario because the money does not get stuck with a limited set of opportunities and keeps circulating. The balance of economy is maintained when businesses keep flourishing because that marks our technological advancements as well.
Venture capitalists promote high risk ventures and help the entrepreneurs to find a way through the market by passing rough phases. This is important because with the motivation and the financial backing support available, more such ventures will bloom and hence the economy would witness a rise. Just make sure to pitch for the right idea at the right time.