Venture Capital Can Make A Good Idea WorkCredit: Javrsmith
Venture capital refers to the investment money typically provided to a new business when there is little substance except for a great idea. Investments of this kind are usually very risky since there are no assets to back the value of the received money. Investors in startup companies therefore expect very high payback levels to compensate for the risk involved. Since company officials are usually incapable of receiving money from traditional lending sources like banks, they are willing to accept venture capital even though they may have to pay higher than normal interest rates. There is often no viable alternative.
Venture capitalists invest their money in startup companies that have the potential to become profitable in the future. This is a risky investment because the company may have no prior business history, they may already have a significant debt load or there may be many other factors weighing against the operation. On the other hand, the company may have a brilliant idea which only needs funding in order to be brought to the market. Once there, the company stands to make a substantial amount of money. The investment could be considered "make or break".
Companies looking for venture capital search in many ways for such funding. Indeed, many venture capital opportunities are not highly publicized or are kept quite secret. Company executives will approach investors directly. Perhaps family members and friends can be given investment opportunities first. This was the approach that the inventors of the board game "Trivial Pursuit" used. They offered shares to people in their local community. Thirty two local investors supplied $40,000 which allowed the game to be marketed. Within three years, the company had sales of $800 million.
Of course for every "Trivial Pursuit" example, there are hundred, thousands, or more, examples of unsuccessful venture capital funding losses. These failed endeavors are exactly why the terms of funding for risky startups is so expensive for the loans.
Where to find venture capital
Companies seeking venture capital funds can turn to the Internet and search for investors. Many agencies have been established to bring inventors and investors together. One such agency is the National Venture Capital Association. The NVCA operates as a central clearing site for both investors and entrepreneurs. They also provide many resources such as industry publications and lists of regional venture capital associations. While larger agencies tend to be members of the NVCA, smaller agencies may be found through the regional groups such as the Atlanta Venture Forum, the Illinois Venture Capital Association and the New Jersey Tech Council.
The key to obtaining startup funding is to develop a good business case that shows the potential for the company to make money. The Internet provides lists of funding sources through the various VC agencies. The company must create an appealing presentation to investors while it also develops their idea. It can be very helpful if the startup company has staff that can create visually attractive presentations. These can be made at the earliest stage of product development. Armed with a good portfolio of product information, the startup company is ready to approach the various investors.
Venture capital has been directly responsible for the development of many successful business ideas. The number of people working as a result of such funding arrangements likely cannot be measured. It has been said that the successful economic engine of venture capital funding is the primary reason that has enabled the United States to become the largest economy in the world.