Larry on Business: Venture Capitalists Beware?

This continues our series on funding or financing your business

The term venture capitalist (or VC) refers to people who provide capital (money) to business ventures. Whereas, angel investors invest without wanting to assume a strong ownership or day-to-day operational responsibility, venture capitalists will quickly step in to correct a struggling business.

Differing Perceptions of Venture Capital Investors
Many people possess bad ideas about venture capitalists. Most heard stories of VCs forcing founding business owners out of office. People hear that VC's look for businesses they can take over. Many know stories of venture capitalists that changed the direction of the business, expanded for global markets, or spending money the business owner never envisioned budgeting.

A closer reality exists. Venture capital investors look for businesses they perceive can give a good return on their investment. In other words, they put their money into companies that will give them back a lot, and I mean a lot, more money than they invested. They do whatever they need to do to get the business showing significant profits. Sometimes, that means changing management that will not, or cannot, make the changes needed.

In addition, venture capital firms focus on firms that can generate a large return. Therefore, they look for businesses looking for $1+ million investments, rather than smaller investments.

How to Find a Venture Capital Investor
The good news: you can find venture capital investors easier than you can find an angel investor. Like many small business resources, you can start with the Small Business Administration (SBA), your local Small Business Development Center (SBDC) and SCORE. The SBA also offers their New Markets Venture Capital Companies. The SBA also maintains a list of Small Business Investment Companies (SBIC). You can also use business magazines like Entrepreneur or Inc. They frequently publish articles analyzing venture firms. Your local economic development agencies also provide information about Venture Capital firms. In addition, even Wikipedia lists major capital firms.

I suggest that you talk to former clients of any venture capital firm to explore their experiences both bad and good. Also, talk to the SBA, SBDC, and SCORE to identify any concerns.

The Venture Capital Process
The Small Business Administration summarizes the venture capital process into the following steps (follow the link to read the details):

Submit Business Plan: the venture fund reviews an entrepreneur’s business plan and talks to the business if it meets the fund’s investment criteria.
Due Diligence: If the venture fund is interested in the prospective investment, it performs due diligence on the small business
Investment: If at the completion of due diligence the venture fund remains interested, an investment is made in the company in exchange for some of its equity and/or debt.
Execution with VC Support: Once a venture fund has invested, it becomes actively involved in the company.
Exit: While venture funds have longer investment horizons than traditional financing sources, they clearly expect to “exit” the company.