Venture capital has become well known for the vital role it plays in the success of startups by providing critical funding to companies while they are in the early stages of development. If you are considering various methods for raising capital, there are a few things you should be aware of in regards to venture funding.
Despite the fact that venture funding often has a somewhat modern reputation, it actually has very humble beginnings, dating back to the creation of The Small Business Act of 1958, which was created in order to provide financial and management assistance of small businesses through the Small Business Administration. During the 1970s, a more organized venture firm assistance was created, paving the way for the venturing funding we know today. Throughout the 1980s and even much of the 1990s, venture capital firms remained somewhat limited, however.
It was in the late 1990s that venture capital reached its peak just as an economy driven by the Internet began to emerge. In the last few years, particularly after the burst of the Internet bubble, venture funding has experienced ups and downs.
Many people often assume that successful startups are able to tap into venture funding from the time they leave the starting gate. This is not actually the case. Startups often spend years working on a concept before they are even able to approach a venture firm. In most instances, founders go to family and friends in order to raise the initial seed money they need to get their business off the ground. Today, crowdfunding has become another popular option for obtaining seed money to develop a working prototype, produce a first-run, or pre-sell a product.
Later, startups may approach angel investors who then make a decision regarding whether to invest based on the history of the startup up to that point, such as notable press mentions, sales numbers, etc.
It is only when a startup has been able to establish itself as being profitable and projecting rapid growth that a venture firm comes into the picture. The entire goal of a venture capital firm investing in a startup at this point is in the hopes that the company will have an IPO or eventual sale, thereby providing the opportunity for the venture capital firm to bring in a large return on their investment. Not all startups receive funding from a venture capital firm, as most firms tend to be highly selective. This is hardly surprising given the fact that three out of four startups fail.
Recently, there has been a tremendous amount of debate regarding the relationship that exists between venture funding and crowdfunding. Many financial experts believe that despite its rapid popularity, crowdfunding will not replace traditional venture capital funding. Crowdfunding is an ideal early forerunner to later-stage funding because it provides startup founders with the chance to gain the traction necessary to attract investors later.
As popular as crowdfunding has become in the last couple of years, it should be kept in mind that it is not the right solution for everyone. Each year, only about 1,000 investments are made in new companies. There just simply is not enough venture capital funding for everyone. In addition, venture capital firms still have a strong tendency to favor businesses that are technology-based. If your startup is outside the technology industry, you will likely need to focus on an alternative path to funding. Despite the fact that venture capital funding is a well-known option, it is certainly not the only way in which a business can grow and even early-stage companies now have a wealth of opportunities available to them.