Introduction to Venture Capital

A business idea is a great thing, but it is not taking you far without some money to develop it. Finding money for your business can be a huge task. Venture capital may be one option, but how does it work? How do most businesses start? They borrow money from a bank, the owner already has it or the business is started on the thinnest of savings and slowly built up over time as revenues come in and are reinvested.

In some cases, a small business will start with a grand plan of going public one day. In such a case, a fourth potential funding option opens up. What is it? The term is known as venture capital and it is a high risk, high return proposition.

Why is venture capital considered high risk, high reward? It is given to companies with the specific anticipation of them expanding and then going public or being sold off in a few years. If they do not, they often fail.

The beginning of this decade saw a very public venture capital example. This was the prime funding for many of the dot com companies. Venture capitalist brought them public, made a ton of money and then got out before things when bad.

Regardless, venture capital funding comes in many forms. The most common is in the form of an investment pool. A venture capital firm will open an investment fund. Investors then put money in this pool.

The investments are big money deals. A fund will often collect $100 million dollars or in that range. At that point, it will stop collecting money so as not to diffuse the possible return. The company is then distributed to companies.

The venture capital firm usually has a business plan of sorts regarding how the monies from the fund will be used. The plan can be pretty much anything the venture capitalist wants so long as it is set before the investors begin putting money in.

Venture capitalists usually stick to a basic template. They want to swing for the fences, but nobody wants to lose $100 million. To spread the risk, the capitalist will not invest in one company. They will choose 8 to 12.

The plan will also designate a niche for the investments to be put towards. The niche usually is tailored to some aspect of technology. Companies like Google had venture capitalist backers and it is a common strategy for technology companies to follow.

What if you do not have a technology company? Are you locked out of the funding? Nope. It is just a bit more difficult to find. There are funds for everything under the sun, so stick to it.

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