Equity Financing For The Small Business
Venture Capital Firms
Basically, venture capital is an investment in an unproven business. Venture capital firms provide equity funds to new and young companies. This immediately separates venture capital firms from investment firms, which prefer to invest in existing, financially secure businesses. Venture capital firms do not make outright loans. Instead, they buy an equity interest in the business that gives them the same advantages and disadvantages associated with equity arrangements.
How do they operate? Venture capitalists are looking for two basic things when considering whether to invest in your business:
- High Return – Because venture capitalists are willing to take unusual risks by investing in a new business, they require unusual returns as well, perhaps seven to ten times their original investment within five to seven years.
- Easy Exit – Venture capital firms will realize a profit by selling their interest in your business at some future point.
In general, venture capital firms are most interested in investing in new technology and can typically supply large sums of money. Venture capitalists are not passive investors. They play an active role in the strategic planning phase of your business and seek continuing involvement. They will also expect to be fully informed about operations, problems and whether your joint goals are being met.
Where can you get more information? Keep in mind that venture capitalists have extremely rigid investment standards and relatively few businesses qualify. Still, this capital source is worth pursuing because venture capitalists specialize in start-up financing and have access to large sums of money. There are many books on venture capital in your local library.
Closed-end Investment Companies
A closed-end investment company is similar to a venture capital firm but has smaller sums of money available to invest. Closed-end investment companies are most likely to invest in a proven business, but some specialize in new businesses.
How do they operate? Like venture capital firms, closed-end investment companies are interested in purchasing the stock of your business. Keep in mind what this means: you will be selling a portion of your business and giving up some control as well. Closed-end investment companies are called closed because they have a fixed amount of money.