You might firmly believe you have found a winning idea or an excellent opportunity to take advantage of but you will need the appropriate amount of financial support and resources to put your plans into action.
Here is a look at how to go about raising venture capital funding, including an overview of the typical funding process from application to due diligence, what sort of businesses are considered suitable for lending, plus a tip on what to expect when it comes to a business valuation.
Understanding venture capital
The most fundamental aspect of raising capital for your business is the need to understand that the process involves a very different evaluation criteria in comparison to trying to obtain a personal loan.
Venture capital is a different form of finance that is primarily used when you have either a new or rapidly expanding business that needs cash to fuel their growth projections and give them the cash flow they need to see the project through.
Venture capital usually involves using specialists like Equify, for example, working with you to create a solution where you agree for a third-party to take an equity stake or even an active role in your company in return for lending the money you need.
Putting your business and plans under the microscope
Once you have accepted the terms of a venture capital deal and are prepared to agree to either offer a stake in your business or have someone alongside you on the board in return for the investment, the next hurdle is to go through the due diligence process.
This involves submitting a detailed and credible business plan that sets out to demonstrate how you are going to make enough money to repay the capital injected into the venture.
Every venture capital deal is likely to be as individual as the business that is asking for the money so the terms will vary according to the opportunity and the perceived risk involved.
Due diligence often involves the venture capital company looking at all aspects of the business including any financial accounts and projections available together with some searching questions about the experience and competency of the company’s management team.
Growth potential
Assuming you tick all the boxes and pass a financial fitness and competency evaluation the venture capital company will then be looking to see that your business has the right amount of potential for decent growth.
Venture capitalists operate in a high-risk environment and they know that not all of their investments will produce a positive return and the odds are fairly high that a good number of them won’t achieve the projected growth or return their capital at all.
Every venture capitalist is going to be looking for a lot of growth potential so that every winner they pick that provides a big return on their investment by way of a huge uplift in the value of the company as it grows, will pay for the losers they have to suffer as part of the game.
As a general guide, a venture capitalist will be looking for something like ten times growth in the first couple of years after they inject their cash into the business. If you have a business proposal that demonstrates how you might be able to take a venture doing $1 million turnover into one that is generating $10 million 24-36 months later, you will most likely have the attention of a venture capitalist, provided everything else stacks up.
Reaching a satisfactory valuation
You would not be alone if you were inclined to put a higher valuation than others on your business, especially when you consider how much time, effort, and money you have put into the venture up to this point.
One aspect of raising funding through a venture capital deal that many business owners find a bit disarming is that the valuation of your business is not something you have a great amount of control over.
”You can arrange to get an independent valuation to make your case and stand your ground but the reality of the situation is that a venture capitalist is entitled to determine their own valuation of your business and it is then up to you to run with that number of walk away” says Milosz from Chilli Fruit Web Consulting.
If they are going to offer you money in return for a 20% stake in your business, for instance, what the business is valued at makes a huge difference to what 20% is actually worth.
A business that already has a proven track record and financial figures to substantiate a valuation is always going to be easier to value accurately and fairly than a relatively new venture that offers plenty of potential, but not much else to back up your valuation.
As long as you are prepared for all these aspects of the negotiation process and you have a viable proposition, it could turn out that a venture capital deal is what you need to take your company to the next level.