Ask SCORE

Ask SCORE

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41 Venture Capital Can Finance a New Business

In assessing options for financing a new small business, many entrepreneurs lo= ok to venture capital. This approach can benefit a relatively unproven enterpr= ise that appears to have a promising future. Securing this type of funding is n= ot easy, however. Venture capital firms expect a business to return their investment with interest plus a large profit. And after the disappointments with many tech-sector companies in recent years, venture capital providers = are particularly wary about where they invest.

Many venture capital firms are affiliated with banks, insurance companies, other financial institutions and large corporations. Some are owned by individual= s or private groups of investors; others are publicly held. The minimum investme= nt is generally from $50,000 to $500,000, but investment ceilings are almost unlimited.

The interest of a venture capital firm in a small business usually depends on t= he stage of the new firm’s development. An investor may be interested on= ly after the new firm has established itself and has a working organizational structure, a viable business plan and start-up arrangement. However, some f= irms prefer to come in at a later stage—perhaps when the new company is in= its second or third round growth stage and needs more capital either to carry o= ut expansion plans or to tide it over until a merger or public offering takes place.

A company’s business plan serves as the primary analytical tool for the interested venture capital investor. In analyzing the plan, investors have three specific concerns:

The product or service. Investors seek product or service innovations that give the company a strong competitive advantage. A new idea, backed by market surveys (measuring the appeal of the product or service and its potential mark= et), may be appealing to investors.
Management capability. No matter how good the product or how innovative the service, the quality= and experience of the management are key factor= s in the success of the business. The astute investor looks for solid evide= nce of such management skill.
The industry’s grow= th. Investors also want to be sure that the product or service is in a gro= wth field. A significant or revolutionary product improvement may neverthe= less lack luster in a declining product or service category.

Most venture capital investors purchase common or convertible stock rather than burden the fledgling enterprise with interest payments on debt or debenture= s. They may want more than 50 percent ownership. Additionally, while investors= may insist on a position on the board of directors or expect to give management= and technical advice, they are rarely interested in day-to-day management issues unless the survival of the business and their investment are at stake.

Bef= ore taking the next step for obtaining venture capital, get outside advice. Talk with your accountant and tax advisor.

If = you would like to discuss this topic or business planning, business growth strategies or a specific business issue, contact SCORE® “Counselo= rs to America’s Small Business.” To contact the Greater Binghamton SCORE Chapter 217 = for assistance call 607-772-8860 or 1-800 -920-6972. You may also contact SCORE® for person to person counseling appointments at the above teleph= one numbers. If you are already in business onsite assistance is also available. The Greater Binghamton SCORE® Chapter 217 website is found at www.greaterbinghamtonscore.= org . The national SCORE® web= site is found at www.score.org or sign up = for email counseling at www.score.org

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