If you are planning to have a business and are wondering from where to get your capital from, then you should get acquainted with what a venture capital fund is. This is one way to get someone to invest in your business. You show them a business plan which you have meticulously planned out, and then they think and ponder whether to invest in your plan or not. If they invest, they will do so in order to get some amazing returns over their investment at the end of the day. That means they are going to go over your plan very carefully, check if there is any potential in it, and if they think your plan is a potential investment, they will go ahead and give you a venture capital fund.
So, basically, a venture capital fund can be considered as a seed investment for a business. You use it to start your business and make it profitable. When it happens, you start repaying the venture capitalist on the basis of a previously decided agreement.
Venture capitalists, when they invest, know that it is not wise to expect returns on their investment in the short term. They know they will have to wait. Some of these persons are ready to wait for more than 5 years for their investment to bear fruit, without any repayment until then. In the meantime, they will tutor and mentor the entrepreneurs on how to go ahead with their businesses profitably. They will give tips and suggestions and even become a part of the board of directors of the company if required. The intention behind that is to protect their investment and make sure that a concept that they had deemed good earlier really begins to bear fruit.
So, how are venture capital funds raised? It is not usual for a single individual to come ahead and put the kind of money that these businesses would require. Usually, venture capital funds are drawn from a pool of wealthy people who are called as the venture capitalists. These people team up together and call for interesting business proposals in which they may invest. They sift through various proposals (there are sometimes venture capital fund contests in which various entrepreneurs are invited to submit interesting proposals and the most lucrative idea is awarded the venture capital fund) and then discuss on what they might invest in. This takes the form of heated discussions and brainstorming sessions among the venture capitalists to find out one idea among the heap which really has the potential.
Once they have decided upon such an idea, they go ahead and draw the requisite finances from the pool that they have. These are the investments that become the venture capital fund.
Despite the precaution that’s taken, venture capital funds are risky investments. Most of the endeavors that the venture capitalists invest in are lost when the companies don’t make the profits that they expected them to. But when a single idea becomes successful, i.e. when the business connected with it makes the kind of profits they hoped for, these venture capitalists can stand to gain as much as ten times of what they invested or even more.
But the bottom line here is that there is a risk involved. And that is the reason why venture capitalists don’t really bend backwards to support a particular idea monetarily. In fact, most of the ideas that are thrown at them meet with rejection without even passing a muster. Even when some idea really holds their appeal, there is a lot of scrutiny before it is even considered as a veritable proposition. There are various checks and analyses and even some market surveys. Various documents are asked for. The entrepreneur is also called to give a presentation to the whole team of venture capitalists involved and this can be quite a harrowing session for the entrepreneur because of the intricate nature of the questions that are asked. All this makes it a very tough proposition to get a venture capital fund for a business. It is known that of about 1,000 applications made in the UK, only 1 application actually ends up getting a venture capital fund.
There are some more constraints that you should know if you are interested in venture funding for your new business.
- Venture capitalists are prepared to wait for some time before they can get some returns. They know that businesses take time building up steam. But this wait period is restricted and that actually depends on the period of the monetary pool that is created. The pool is generally for a period of 10 years so that the formalities of management are reduced and the risk for these venture funding companies are lessened as well. That means you will have up to 10 years to make your repayment with most of these venture capital investors
- Another thing that you should know is that venture capitalists will want to be minutely involved with your business. This is especially true if you are a complete novice. In such a case, they might even ask for a managerial position in your company and they might even ask to take over the entire management of the company. This eventuality can occur if you are not able to manage your company properly. Since you are working with their investment, you cannot refuse when they make such a demand.
- The agreement that you make with the venture capitalists is very important. You need to go through it very carefully, just as they would be going through your business plan. See what clauses are included so that you don’t meet with some shockers later on in the day. The most advisable thing is to allow your attorney to see this agreement.
These are some of the things that you have to bear in mind when you are looking for a venture capital fund for your company. Don’t just be too happy that you are able to get these funds; there is a lot involved and even if you are one of the few lucky ones who actually get these investments, things need to be done very carefully.