The Keys to Raising Capital for Your Business
By Jennifer Harwood
The
world of venture capital for small and growing businesses is both exciting
and daunting. While securing a ''heap of cash'' to develop the business
or product may realise many business owners' visions and dreams, the challenge
of managing the investment, people, investors, product development and
growth has the potential to shatter those ideas in a matter of months.
If you are contemplating using venture capital, you should find out as
much as you can about it, what you need and who can help you before you
start on the search for venture capital funding.
What is Venture Capital?
Venture capital is a method of financing fast-growing private companies
that are involved in development and expansion. Usually, an investor provides
equity finance such as cash, line of credit or debt facility to the company
in exchange for an equity position in the business i.e. ownership of shares.
Unlike a bank that requires regular payments and interest, the venture
capital investment is made with the intent of receiving a return over
a period of time (usually 3-5 years). It''s called ''patient capital''. The
venture capitalist will realise their investment when the business is
sold (trade sale) or publicly floats on a stock exchange (IPO).
Types of Venture Capitalists
1. Friends / family / your own mortgage -
all can invest in your business. The business or idea is in concept phase
and needs funds to get off the ground. Investment is usually between $50,000
and $500,0000. (Seed phase)
2. Business Angel - a high net worth individual
who has management and business experience looking to invest in a fast
moving business. They can contribute cash as well as time, alliances,
introductions and mentoring. This is a high-risk investment phase and
hence these investors seek high returns. Investment is usually between
$100,000 and $1 million. (Start-up phase)
3. Business Angel Groups - a group of high
net worth individuals or companies pooling resources and talent together
to fund specific business types or industries. Investment is usually between
$100,000 and $5 million. (Start-up and expansion stage)
4. Boutique Venture Capitalists - again, these firms specialise
in industry sectors such as biotech, health, agriculture etc. They usually
get involved with a business that has received initial funding by angels
and has had time to prove the business concept. Investment is usually
between $2 million and $10 million. (Expansion and development stage)
5. Institutional Venture Capital Firms - the ''big end of town''.
Investing anywhere between $10 million and $100 million, they take businesses
that have been growing rapidly, managing that growth well and are looking
to list (IPO). They help the company float as well as develop further
strategic alliances and expand the business.
How to Attract a Venture Capitalist
Venture capitalists determine the viability of a growing business by thoroughly
reviewing it to determine if it is likely to be worth more in the future.
This is called due diligence. They look at current business activities,
revenue models, growth strategies, the management team in place, market
potential and industry trends. Simply put, they review the business inside
and out, as well as the marketplace space that the business is presently
in.
The business owner will need to understand
all of these issues and more to excite the interest of a venture capitalist.
In order to do this, the business owner should write a PLAN. Yes, the
dreaded four-letter word! A written plan, nicely bound and tied with a
gold ribbon is not really the outcome a venture capitalist will be looking
for. They will want to ''hear'' and ''see'' a business owner that has complete
understanding of the space the business is in and where it''s going. The
plan enables the owner to fully explore and accept the business opportunities,
limitations, strengths and areas for improvement.
Steps to Acquiring Venture Capital
If you think your business will require venture capital there are a number
of steps you can take:
1. Learn more about equity finance - venture capital
and business angel investment.
2. If you don't have a business plan, write
one.
3. If writing a plan is a bit daunting, hire a coach, advisor or
consultant to help you.
4. Talk with AVCAL (Australian Venture Capital Association), equity
matching services and business brokers about the process, how they operate,
the fees involved and time frames.
5. Take your time. Be informed about all of the issues before racing
into an agreement. All venture capitalists and business angels are looking
for ''the deal'' of the century and you want to find the best opportunity,
investor and finance solution for your business.
Jennifer Star has worked in the business development
arena for the past 10 years assisting small companies, non-profit, government
and corporate organisations capture opportunities, develop projects, and
secure funding. Jennifer was recently recognised for her business planning
talent when she won the AusIndustry National Award for Best Business Plan
in November 1998.
Jennifer's company, DIRECT INCITE provides
business development support services to growing businesses and professionals.
Services include strategic business planning, web strategy, investor readiness
consulting, business angel matching, new venture development, industry
research and business coaching. Matching people, resources, opportunities
and ideas, the company's theme is DIRECT your resources and INCITE fantastic
results!
As a member of the Australian Businesswomen's
Network she would be delighted to assist your quest for equity finance,
business planning and venture capital networking.
You can email her anytime at: info@directincite.com
