Is Venture Capital Financing
Really An Option?
As a small or medium sized business (SME)
owner, is it practical to consider venture capital
financing as a source of capital for your business?
Before getting too deep into the answer,
let’s first define what we mean by venturing capital
financing.
It’s a form of equity investing, usually holding a
minority position in a company. The funding source is
usually an investor group, institution, or investment
fund looking for an above average return on investment.
The amount invested tends to be unsecured and high
risk and the investor is usually involved in the
business with some element of control such as a seat on
the board of directors.
Many people refer to this type of financing as patient
money as it usually needs to stay invested for 3 to 10
years in order to generate the level of return required,
which is usually 25% and up.
For small and medium sized companies, venture capital
financing usually starts at $1.0 million dollars and up.
So in that sense, it can automatically eliminate itself
as a financing source for many SME’s.
Venture capital financing is focused on start ups and
early stage development companies that have exhausted
their personal equity sources and available debt
financing options. Businesses that are most interesting
are those with innovative products or unique technology
that can be made into market penetrating products.
Ultimately, the business would need to have the
potential for an IPO or private placement somewhere down
the road to provide an exit strategy to the investor.
For most SME’s, this is an extremely difficult form of
capital to raise with literally 100’s of requests for
every investment placed.
While there are organized information exchanges to
locate investors, the right of passage into venture
capital financing is very difficult. Because of greater
demand for venture capital funding than supply, the
investors have the ability to pick and choose their
opportunities very carefully.
And, depending on the level of desperation of the
business, the venture capitalist can command a high
ownership premium relative to the true underlying
potential market value of the business.
To be successful acquiring this form of equity
financing, you usually need to have a strong business
concept with strong market growth potential, and an
exceptionally strong management team that can
demonstrate past successes in similar businesses.
All that being said, it is still a real option for some
SME’s, but acquiring it is not as predictable as other
forms of capital.
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