How To Fund Your Small Business With Venture Capital

Date: August 14, 2009

Because of the complexities and variations of the venture capital industry, understanding how it works can be daunting for small business owners looking for funds. But with a bit of research and patience, you can learn the basics of venture capital and, in the process, improve your chances of securing funding for your business

Key Elements of
Venture Capitalists

  • Typically prefer investing in new and innovative companies that are less likely to land a bank loan or undertake a debt offering. The small company will give major ownership and management control to the VC as an incentive for the VC to invest. The earlier in the investment stage, the more equity in your company you will likely have to give up.
  • In the most common form, tend to be firms rather than individuals (who are often called "angel investors"). So depending on your level of business acumen, communication strength and interpersonal comfort level, this must be considered if you approach a VC for support.

To secure venture capital, follow these five tips:

  1. Look at small business investment companies.
    SBICs are for-profit investment firms licensed and regulated by the U.S. Small Business Administration. To qualify for SBIC investment, your small business must have a net worth of no more than $18 million and have averaged a net income of no more than $6 million during the previous two years of operation.
  2. Be prepared to explain why your company is poised to hit the big time — and soon.
    Expect to be asked questions as to the long-term viability of your company and even if you have a timetable to take the company public. Venture capitalists focus on the future. You should too.
  3. Have connections.
    If you can leverage existing relationships, you have won half the battle of landing funding.
  4. Prior to meeting with a venture capitalist, devise both a well-structured executive summary and a precise presentation strategy to minimize the stress that could come with the effort.
    Have all of your official documents and financial forms in order. This is not a game. Venture capitalists are driven professionals who operate in high stakes environments. They expect the small companies in which they invest to be run the same way.
  5. Ideally, approach a venture capitalist with experience investing in your small company's industry or sector.

Landing venture capital for your small business is not easy. Although working with a VC can be very attractive, most small businesses are capitalized through family, friends and/or angel investors. However, having a focused plan, helpful connections, strong communication skills and a long-term focus will improve your chances of securing FC money.

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