Interested in obtaining venture capital for your business? You need to understand what it means to obtain early-stage capital funding. Or maybe you are interested in becoming an investor, and you need to know what to expect from your soon-to-be business partners. In either case, here are five things you need to understand about VC investments.
1. Not Every Business Is Right for VC.
Venture capitalists invest in businesses where rapid growth is likely. That means a business with a truly innovative product, on the cutting edge of emerging technology, or with serious power on their management team.And they like to invest in businesses in sectors they have worked in and understand – very often technology hardware and software, healthcare, and manufacturing. They investor will also want to see that you have invested your own money in the business, and therefore you are sharing in the financial risk, before they stroke a check. The investor will also want to see a track record of product development, market research, and/or sales and revenue before they make their investment.
2. VC is Not a Loan.
There is no guarantee of repayment to an investor. An investor in your business becomes a partner in your business. Don’t expect them to be the silent partner type, either. Early-stage investors expect to see how they are going to get repaid if and when your business takes off. You can structure that as a majority ownership interest, preferred ownership interest (meaning they get paid profits first), options to buy more ownership in the business down the line, a right of first refusal on sales of ownership interest, or some combination of those.
3. The Investor Is In Control.
Investors in an emerging business want to tip the scales in favor of making a profit. That means having a say in control of the business, if not some say in operations and product development. They may want to direct what professionals you use: your lawyer, accountant, and consultants. They may even want to appoint your CEO or chairman of the board. Expect any capital investment to come with strings, and to be accountable for every cent of the money that is invested.
4. Your Team Matters More than Your Product.
Having a strong management team will matter more to an investor than having created the latest technology. A great management team will be able to forecast and adapt to market changes, drive faster product development, and shepherd a business from idea-stage to profitability to sale of the business or public offering. And an experienced team will be able to maximize the investment capital the business receives. Choose your team wisely, and listen to the suggestions of your investors.
5. VC Funding Takes Time.
Don’t expect to get VC funding overnight. First, you need to pitch a proposal and business plan to the investor. Once they are interested in you, nvestors need time to do their due diligence on you, your business, and your product. Meanwhile, you should be doing your due diligence on the investor to make sure that they really are qualified to make a capital investment in your business and that you want them involved in your business. Then you and the investor need to hash out terms of the deal. Once everyone is on the same page, then and only then should you proceed with having your lawyer write the agreements you will need in place. Then you can close the deal. Plan for the process to take several months, and budget your funds accordingly.
Need help with due diligence or structuring an investment deal? We can help. Call Suzanne Meehle at 407-792-0790.
Carlos Carbonell, CEO, Echo Interaction Group
Rob Henlon, Fierce Entertainment
Michelle Widmer, Founder & Director of Events, The Empress Table
Rodney E. Luke, President, Luke Brothers Custom Homes