There are some basic things you need to know about venture capital for small businesses if you are a small business looking to secure such investment. There are both good and bad outcomes for companies which secure venture capital, but if you are open with your business plan and follow a few simple guidelines —venture capital can be one of the best ways for your small business to grow. The aim of this article is to introduce those basic guidelines and eradicate some of the misconceptions associated with venture capital for small business.
What is Venture Capital?
When a company is starting up, there will first be a period of market research so the business model can be planned. It will then be apparent if the company has the opportunity for rapid growth because of a gap in the market. It is at this point that banks may not yet offer the small business owner a loan, but there is still a lot of money required to get the business off the ground. This is a prime example of where venture capital can come into play.
Who Provides the Money?
Venture capital for small businesses is usually provided by an individual with a high net worth and experience in start-ups. They are known as “angel investors”. Usually the angel investor can provide more than just the money required for the business to start up. Often they take an active role in advising the business owner in areas where experience is a factor —along with providing business connections.
What does the Venture Capitalist get out of it?
In exchange for the money and time invested a venture capitalist usually gains shares in the company and some control over the running of the company. This means that for a successful business, the capital provider can make a lot of money —much more than other types of investments. However, the trade-off is that there is greater risk involved in these high growth potential small businesses as there is a chance that the business will be unsuccessful. The providers are often former start-up owners themselves so they will give the company a greater chance of success. One of the main motivations of angel investors providing venture capital for small businesses is that they want to see something growing from nothing, rather than just continuing the running of their current investments. The investor will often sell their share of the company after four to six years, or once the period of rapid growth has ended.
How do I Keep Control of my Small Business?
There is sometimes a misconception that when a venture capitalist comes in and purchases equity, they will take over the company and change its direction. It is rare that this is the case. They will, of course, take a very avid interest in the company and as the founder of the small business; you should want them to be working as hard on the business as you are. This is not to say that they will take control. As long as you regularly have contact with the investor and are open to their advice, you shouldn’t have any problems maintaining control of your company. Another key thing is to be very open with potential investors during the negotiations in terms of where you see the business going. You should only select someone who you believe has a passion for your dealing and appears to want the same thing as you do.
Venture capital for small businesses is one of the best ways to obtain rapid growth, not only because of the money, but the advice and connections as well. It is certainly something for small business owners to consider if they are in a rapid growth market.