Being a start-up company can be difficult.
You have to lay the groundwork for the future while ensuring that you take the right steps to get there. You might struggle with your structuring your business model or developing your brand. More critically, you might struggle financially.
This is where venture capital comes into the fold.
Just in 2019 alone, Canadian venture capital-backed companies raised $4.1 billion for over 469 deals. It highlights the importance (especially in today’s unbalanced economy) – of how venture capital can stimulate growth for start-ups.
Knowing what to expect from an investor and how it can spur your business can make accepting venture capital less complicated.
What Is Venture Capital & What Is A Venture Capitalist?
In its most basic terms, venture capital is the funds that are provided by an individual or company – known as venture capitalists – to a business that needs additional funding.
As The Balance puts it, “venture capital is other people’s money. It is financing for new, usually high-risk start-up businesses.”
The line “high-risk start-up businesses” highlights a key point: venture capitalists are not interested in services or products that do not have the potential to grow. They look for small companies that can become household names in a targetted industry. A prime example of a successful capital venture is Facebook.
Peter Theil, a venture capitalist, made a $500,000 investment in Facebook for a 10.2% stake in the company in August 2004. That initial funding helped Facebook continue its spread and growth, becoming the social media mogul it is today.
Other successful capital ventures include Alibaba, Spotify, Whatsapp, Groupon and Twitter.
Therefore, if your business has the potential to grow, and more significantly, can grow rapidly, it can become a target for venture capitalists.
What Are The Advantages Of Working With Venture Capitalists?
Growing Your Business
First and foremost, additional funding provides your company with an opportunity to grow. The increase in funds will help you invest in more employees, more technology, develop your marketing, and structure your business operations so that it can reach new markets.
Whatever is required to help your business grow, the addition of venture capital funds can make it happen.
Despite the benefits that come with additional funding, venture capitalists offer many other advantages that can help spur growth for your start-up. Significantly, you will have an understanding of how to run your business successfully.
You will have an established investor who will take an active role in your company. They will provide expertise and guidance, help with business decisions, such as financial and human resource management, build strategies, provide access to resources – anything to help you make better decisions in critical areas, so your business grows.
Networking & Connections
Venture capitalists also have a massive network of connections in the business community. You will have access to all those by association. These connections can be advantageous for your start-up, as you will have the opportunity to make alliances with potential customers or business partners. These partnerships can help push your business in the direction you want while improving your business, both professionally and financially.
Don’t Venture Capitalists Want Something In Return?
No deal is done without an exchange, and the same applies to venture capitalists.
Commonly, venture capitalists tend to want equity in the business – usually a specific percentage, or a certain amount of stocks – meaning you no longer have full control over your business.
As such, “the venture capital firm gets the right to an opinion about how your company operates.” You, therefore, are no longer making decisions for the company yourself. It is split amongst the investors.
However, not all venture capitalists or companies work in the same manner.
Some firms make deals where they only expect a certain percentage back once a goal has been reached. Some, like GrowME Marketing, offers a “revenue-share model” alternative to venture capital by providing their services in exchange for a percentage of the revenue.
At the end of the day, it’s not just about finding the right venture capitalist but finding a relationship that works for both parties. Just as much as venture capitalists are looking for the next big thing, you too can be on the lookout for an interested party.
Finding The Right Venture Capitalist To Work With
Since venture capitalists only select a handful of start-ups to invest in every year, it might become quite challenging to find one – especially one that works for you, just as much as them.
That doesn’t mean you shouldn’t invest your time in finding the right partnership. There is a sure way in which you should pitch your business to investors:
- Focusing on the correct type of market investor. For example, if your product is an online app, why would you pitch your business to a venture capitalist that is focused on retail stores? Stick to your market and focus on an investor within it.
- Don’t forget your numbers. Numbers can make or break a deal, so make sure that you are well prepared with your finances. As BDC states, “investors need numbers to understand your company’s potential market and scalability. They expect the founder to know the finances and key metrics of their company.“
- Be honest with the pitfalls of your product or services. Selling the Golden Goose seems too good to be true. You have to be frank with the pitfalls of your product or service, so your investor knows how to help you.
Remember, it is a two-way street. They have to want your business, and you have to want to work with them. Don’t settle for anything that won’t benefit your business in the long-term.
You have control of the direction of your company, and with the assistance of a venture capitalist, it can go the way you want it to.