Entrepreneur's Guide on Venture Capital Funding

Budding companies seek venture capital firms to offer them financing. Other than financing, venture capitalists can contribute to the capital, strategic assistance, introductions to potential customers, partners, employees, and much more. However, it is not easy to close the deal with venture capital because of such significant contributions.

It will better fit entrepreneurs to get venture capital financing when they understand the process, the anticipated deal terms, and the potential issues. If you are searching for all these items that bring you close to your desired venture capitalists, this article is for you. So keep on reading to know all that you need to know about venture capital financings.

What is Venture Capital?

The first and foremost thing you must be aware of is who is actually a venture capitalist and what their role is. A private or institutional investment made into early-stage companies or new ventures. Venture Capital is money invested in small businesses or exists only as an initiative but has enormous potential to expand. The people who fund this money are called venture capitalists (VCs). When a venture capitalist purchases shares of a company and becomes a financial partner in the business, venture investment is made. Venture Capital investment is also referred to as risk capital or patient risk capital. It is called so because it involves the risk of losing the money in case the venture doesn't succeed and takes medium to long term for the investments to fructify.

Typically, Venture Capital comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.It is the money contributed by an outside investor to finance a new, growing or troubled business. The venture capitalist provides the funding knowing that there's a significant risk associated with the company's future profits and cash flow. Capital is invested in exchange for an equity stake in the business rather than given as a loan.

Venture Capital is the most suitable option for funding a costly capital source for companies. Most businesses have sizeable up-front capital requirements that have no other cheap alternatives. In addition, software and other intellectual property are generally the most common cases whose value is unproven. That is why; Venture capital funding is most widespread in the fast-growing technology and biotechnology fields. The most significant features of venture capital investments include:

• Higher rate of risk
• Lack of Liquidity
• Long term horizon
• Equity participation and gains on the capital
• Investments are made in innovative projects
• Suppliers of venture capital participate in the management of the company

There are few methods that are used for venture capital financing. These are Equity, Conditional loan, and participating in debentures.

The process of Funding

After understanding all about who a venture capitalist is, the next question that will come into your mind would be, "what is the process of transferring the funds?" If you approach venture capital for funding a company, the process is shared below step by step. Generally, the venture capital funding process consists of four phases in the development of the company. They are:

• Idea generation
• Startup
• Ramp-up
• Exit

To understand better, let us dive straight onto the steps.

Step 1: Generation and submission of the Business Plan

Generate your business idea and really write every in-depth detail about it. The first and foremost step would be to approach a Venture Capital with the business plan and submit a business plan. Ensure that your business plan must elucidate the points given below:

• An executive summary of the business proposal.
• A complete description of the business opportunity, the market potential, and size.
• Survey and review the existing and expected competitive scenario.
• Details of the financial projections.
• Details of the management of the company.

Make sure that your business plan must fulfill all the questions that arise in the mind of the venture capitalist and should be easy to understand.

These detailed analyses of the submitted plan will help the Venture Capital to decide whether to take up the project or not.

Step 2: Introductory Meeting

Once the VC does the preliminary study and finds the project as per their preferences, there is a one-to-one meeting. This meeting is called for discussing the project in detail—this is where you get the chance to meet the client and convince him about your business potential. After the discussion, the VC ultimately chooses whether or not to move ahead to the due diligence stage of the process.

Step 3: Due Diligence

The due diligence phase differs depending upon the nature of the business proposal. This is that stage of the process that involves solving queries. The queries can be related to customer references, product and business strategy evaluations, management interviews, and other exchanges of information during this period.

Step 4: Term Sheets and Funding

After the due diligence stage is satisfactory, the VC provides a term sheet. This term sheet is the non-binding document explaining the basic terms and conditions of the agreement for the investment. It is offered to the business people to have details about the final deal and share their views about it. This term sheet is negotiable, and every party involved must agree to it before the VC moves to the final legal documentation. After which on completion of legal documents and due diligence, funds are made available.

Types of Venture Capital funding

Various types of venture capital are classified as per their applications at different stages of a business. The three major types of venture capital are given below:

1. Early Stage Financing:

Early-stage financing has three sub-divisions. These are seed financing, startup financing, and first-stage financing.

Seed financing is defined as a small amount that an entrepreneur receives to be eligible for a startup loan.

Startup financing is given to businesses to finish the development of products and services.

First Stage financing: Companies that have spent all their starting capital and need finance for beginning business activities at the full-scale are the primary beneficiaries of the First Stage Financing.

2. Expansion Financing

Expansion financing may be categorized into second-stage funding, bridge financing, and third-stage financing or mezzanine financing. Second-stage financing is provided to companies to begin their expansion. It is also known as mezzanine financing. It is provided to assist a particular company in expanding in a significant way. Bridge financing may be provided as a short-term interest-only finance option, and a form of monetary assistance to companies that employ the Initial Public Offers as a significant business strategy.

3. Acquisition or Buyout Financing:

Acquisition or buyout financing is categorized into acquisition finance and management or leveraged buyout financing. Acquisition financing assists a company in acquiring certain parts or an entire company. Management or leveraged buyout financing helps a particular management group to obtain a particular product of another company.

Venture capital financing can be important to the success of a startup. Now that you know all about a venture capitalist and understand the critical features of venture financings, entrepreneurs can increase the likelihood of a successful outcome. It can be difficult getting a VC but not after you have the right knowledge and assistance. All you need to do is be confident and get the VC for your company.