Venture Capital Firms & Angel Investors

Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up and expanding companies.

Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.

Venture capital firms generally:

When considering an investment for business finance, working capital etc, venture capitalists carefully analyzes the technical and business merits of the proposed company.

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Venture Capital firms will help companies grow, but they eventually seek to exit the business finance investment in three to ten years, depending on the business plan. An early stage investment make take seven to ten years to mature, while a later stage investment many only take a few years. The venture investment is typically neither a short term nor a liquid investment, but an investment that must be made with careful diligence and expertise.

Venture Capital firms generally offer financial support to new & rapidly growing companies, purchase equity securities, offer assistance in development of new products or services, add value to the company through their active participation, have long-term plans, and take higher risks with the expectation of higher rewards. Angel investors may either be wealthy people with management expertise or retired business men and women who seek the opportunity for first-hand business development.

The typical description of a venture capitalist is that of a wealthy private investor who wants to provide working capital for start-up companies. The perception is that a person who develops a brand new change-the-world invention needs business finance; thus, if they can't get the funding from a bank or from their own pockets, they enlist the help of a venture capital firm.

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Venture capital firms and private equity firms are pools of capital, typically organized as a limited partnership, which invests in companies that represent the opportunity for a high rate of return within a shorter period of time, depending on the business plan. They are entrepreneurs first and financiers second. These "angel investors" will mentor a company and provide needed capital and expertise to help develop companies.

Not all venture capitalists invest in "start-ups". While venture firms will invest in companies that are in their initial start-up modes, venture capitalists will also invest in companies at various stages of the business life cycle. A venture capitalist may invest before there is a real product or company organized, or may provide business finance to start up a company.

During the first stage business growth, appropriately called "start-up", foundation money and working capital funding is needed.  Usually, the first line of attack during this phase is the entrepreneur's family and close circle of friends.  It is important to get at least one financial partner from this inner circle if possible.

Next, the "angel investor" is a great boost to any company fortunate enough to attract one to provide business finance and financial advice.  Angel investors are individuals with large resources allocated for business financing that have a desire to invest working capital funds into start-up companies.  Business Angels usually are found by word of mouth. The U.S. Small Business Administration estimates that, nationwide, there are approximately 350,000 active angels investing in about 50,000 companies each year.

The perfect time for a company to attract business finance via a venture capital firm company is called the "development phase". Companies in this phase typically seek investment dollars from private sources such as angel investors or venture capitalists.  Due to the difficulty of raising capital at this risky stage of a company's development, initial public offerings (IPO's) may be possible as an alternate means of obtaining funding.  The only downside, of course, is that entrepreneurs lose a percentage of personal control; however financial liquidity will enable the company to prosper.

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Another option is for companies with established track records seeking further business finance using a venture capital firm for additional or "expansion" funding.  Meanwhile, some venture capitalists who come in on the ground floor may establish a plan for investing in stages.  After each investment stage, the investor will wait to see that predetermined criteria are met before advancing the next instalment of business funding.  In addition, satisfied investors and borrowers and strategic partners sometimes provide another source of venture capital at the "mature" stage.  This is especially true if the company's customers are other institutions with a desire to form a future or continuing business relationship with the new company.

In order to find venture capitalists or other investors who are willing to invest in a "brilliant idea", it is important to understand the transaction from the investor's point of view.   That is, what do they want from the deal?  Generally, they want a sound, long-term capital gain on their investment.  This translates into adequate rewards for the level of risk they are willing to take.  If the investor is a family member or friend, pride in the enterprise might be an intangible side benefit of the deal. Venture capitalists and other investors want a great deal of information prior to signing on to a project.  They may wish to see specific guarantees, and often will require contractual language that allows them to "take over" if the project does not proceed according to plan.   In return, they contribute working capital, business skills and expertise to the enterprise.           

To be able to convince an investor that a company is an economic winner, one must have several factors firmly in place:  First, the company will need an excellent business plan that gives a clear description of the product or service offered and of the targeted customers or clients.  The business plan must describe the size and nature of the projected market and must provide a detailed discussion of the business operations needed to reach that market.  It should include biographies of key management personnel, executive compensation schemes and option plans, as well as a discussion of other staffing needs. The assistance of an experienced attorney, business plan writer and accountant may be helpful when developing this very important document.

In the case of an already launched business, it is also important to have financials that demonstrate the existence of a real business, not simply a brilliant idea .  Investors also want to see a solid corporate entity with a committed set of business professionals already on board, ethical legal practices, and safeguards to protect copyrights, patents, trademarks and other proprietary information.

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