Tuesday, August 18, 2009

Thinking of further funding for your “burning” hot venture?

So, your little business is successful and is expanding. That’s great!
So why are you so upset?

Ooh… Your “burn rate” (cash spent per month) is exceeding forecasts because your company is growing beyond your wildest expectations and your reliable funding sources like your Mom and Dad, credit cards, and best friends are maxed out, yikes!
Have no fear, VC is here…

No, VC is not an STD but an acronym for Venture Capital; a viable alternative to more debt financing that can come at a cost.

Venture Capitalists typically invest in companies with huge growth potential, usually in high-tech start-ups. Because VCs invest in “potential” early rather than in latter but proven tangible growth, they are similar to start-up entrepreneurs in that they face great risk which can potentially lead to a complete loss of invested capital should the start-ups fail (remember the dot-com crash? Ouch).
So why do VCs invest in potential?

Because the potential rewards can be even greater; the risks are offset by proceeds from successful portfolio companies distributing multiple returns on VC investments. How? Professional VCs use their cumulative investment experiences to minimize their exposures and maximize their limited resources.

But why VCs, you ask?

VCs play an important role in economies by investing in companies that are cash-strapped and cannot secure bank loans because they don’t have any tangible assets to trade as collateral. VCs typically begin to invest cash in exchange for shares in the portfolio company and later supplement with debt financing.
VC is a broad sub-component of Private Equity, an asset class of equity securities in privately held companies, that is typically funded by High Net Worth Individuals (HNWIs) or Institutional Investors via pooled investment vehicles or funds operating as LLCs.

VCs also offer value beyond the traditional financing role by adding skill sets and industry connections not easily attainable by new enterprises. But VCs also take a more hands-on approach to their portfolio companies by securing Board of Director positions that can influence company decisions and via restrictive covenants among other things.

It’s my company, why would I want to give up control to some VC, you say?
VCs can be a “double-edged sword” in the sense that you give up some control over the venture only to gain in strategic guidance, operational expertise and corporate governance among other things. It’s like being married; you yield some individuality to “synchronize” with your VC partner and benefit from the resulting synergizes, after all it is long-term partnership at least until the IPO or other liquidation event.

Ooh… that’s why…

Ultimately, you can go it alone and maintain control over your successful venture, but if you want your successful business to grow you’re going to need financing. Chances are that your best bet is a “suitable” VC, especially if you have no collateral.

By the way, VCs tend to discard virtually all the investment opportunities offered to them, so if a VC comes knocking do get to finicky, go open your door. Can you imagine where Bill Gates, Pierre Omidyar, Steve Jobs or Michael Dell would be if they didn’t?

Think about it…

EZ the VC

No comments:

Post a Comment