Executive Summary
-
Sources of capital depend on whether it is an early-stage company or a rapidly expanding business that is seeking significant financing.
-
Angel investors rather than venture capital funds usually provide seed capital for new companies.
-
Use your network to get connected with sources of venture funding, and know your audience before you meet with them.
-
Venture capitalists look for high rates of return and have a relatively short time horizon.
-
These investors will assist the entrepreneurs with many aspects of their business besides capital.
Introduction
There are many sources of venture capital. They include:
-
friends and family;
-
individual angel investors or angel investor groups;
-
early-stage venture capital funds (VCs);
-
expansion-stage and later-stage VC funds;
-
community-based venture funds; these are often run by development agencies, which are usually funded or subsidized by local government funds designed to stimulate business growth.
This article answers a number of questions about obtaining venture capital. When is it appropriate to seek venture funding rather than bank financing? How do you go about finding these funding sources? How do they differ, and what drives their investment decisions? Entrepreneurs and their management team need to understand the role of these investors, what expectations they will have for return on their investment, and over what time frame they will expect to earn those returns.
Early-Stage Companies
Companies are usually started by a single entrepreneur or a small group of entrepreneurs. These founders frequently work for no pay, a situation that is referred to as “sweat equity.”1 The initial cash needed is likely to be provided by the founders, but may be supplemented by money from friends and family members who have a variety of reasons to want to be a part of what the founders are doing. This type of funding is sometimes referred to as “seed capital.”2 The founders may also seek bank financing, but if the bank is willing to extend credit it will probably be based on their personal assets or borrowing capacity. Banks rarely lend to companies that do not have a track record of revenues and profits.
Venture capitalists generally expect to see that the founders have put in a combination of sweat equity and personal cash, and they prefer to see that they have raised some money from friends and family. After exhausting these sources, entrepreneurs may think it is time to approach VCs to raise the funds they need to grow their business. In fact, although VCs did invest smaller amounts in the 1970s and 1980s, they are now much larger funds and tend only to invest when companies need multiple millions. As this transition was taking place, angel investors began to fill the gap between friends and family and VCs.
- Page 1 of 6
- Next section Angel Investors
www.qfinance.com