Weighing The Venture Capital Option

Venture Capital Young, high-potential growth businesses are the most common users of venture capital: private equity funds made available in the interest of creating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capital usually comes from institutional investors and high net worth individuals and the deals are put together by dedicated investment firms.

Venture capital investments are often structured so that the venture capitalist gets convertible preferred stock in your company. This gives the capitalist preference over the common shareholder in the event of a liquidation or merger.

In July 2008 the Wall Street Journal reported that Google is planning to launch a venture capital arm. Intel, Motorola and Comcast are examples of other tech firms that already have VC units. There are directories available online that detail active venture capital firms willing to finance small businesses in almost any industry.

If you’re interested in venture capital, it will be useful for you to become familiar with some of the key terms used in the industry:

• Exit – in order to take the profits that the venture fund develops in the company, the venture capitalist must sell or in some way decrease his or her interest in it, since the fund will have a specific duration. This practice is considered "exiting" or "cashing-out."
• Institutional Investors – large organizations with huge amounts of capital, for example mutual fund and insurance companies, and pension funds for public and private organizations.
• Portfolio Company – a company in which the venture capitalist has invested time, money or resources.
• Upside – capital appreciation resulting from the portfolio company being with more when the fund is winding up than it was worth when the fund invested its capital.

As you approach venture capitalists, remember that this type of financing is a local face-to-face game – investors like to know whom they are dealing with. Once you hit upon a local investor do some further research through their website or call the company to find out if they invest in your type of project. Finally, you should find out the capitalist’s preferred deal size. As with any other type of financing, it is important to know all the facts before you waste your time and the venture capitalist’s with a useless proposal.