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Is Venture Capital The Answer For Your Business?

We've all heard about venture capital firms over the years. But is venture capital a potential financing source for your business? Venture capitalists are persons who invest in a business venture, providing capital for starting or expansion. Venture capitalists are looking for a higher rate of return than would be given by more traditional investments. Usually, they are looking for 25 percent and up in return for their investment. Some venture capital firms are owned by individuals or private groups of investors and a few are publicly held. Also, many are affiliated with banks, insurance companies, other financial institutions and large corporations. When you accept venture capital for your business, you have to be aware that the venture capital firm will take a large share of the profits you earn and accept that you have relinquished some of your autonomy.

The greater the risk, the greater the return the investment firms will expect. Generally, a venture capital firm will not be interested in getting involved with a new firm until the business has established itself in some way, so the risk factor can be determined. Once the new business has established a viable business plan and a working organizational structure, a venture capital firm may be interested. The primary tool that venture capitalists use to analyze businesses is the company's business plan. When analyzing the plan, a venture capital firm would most likely focus on three features: The product or service, management capability and the industry's growth.

Usually, venture capitalists look for product or service innovations that give the company a strong competitive advantage. They also look for quality, skills and experience of the management. Investors also want to be sure that your products or services are not in a declining product or service category.

A structured financial planning doesn't guarantee that you'll be able to get capital from a venture firm. Not making them, will assure that you won't receive favorable consideration from venture capitalists.

The majority of venture capitalists specialize in certain industries, and many provide corporate direction as well as financing. This aspect of specialization is what makes venture capital financing difficult to obtain for most new businesses. Venture capital firms usually specialize in high-tech, computer, and Internet services. Others specialize in scientific projects and inventions that require a lot of investment. So, maybe a venture capital firm isn't the right financing alternative for you if you're planning to open your own pet shop.