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Financing Your Small Business Money. Capital. Financing. Cash. No matter what you call it, you can’t start or run a business without it. Unfortunately, raising the money you need can be a complicated and frustrating experience. There’s plenty of investment money out there. If you know where to look. You’ll discover a variety of sources of financing from banks and Micro Finance Companies. Venture capital- what is it and how does it work ? Starting or operating a business can be one of the most rewarding and challenging tasks a person can undertake. However, for new entrepreneurs looking to get a business idea off the ground or small business owners wanting to expand, develop a new product or break into a new market, money can often be a stumbling block. A business' ability to raise finance can often make or break it. This can be an especially testing time in a business' life cycle, as raising finance can sometimes be a daunting prospect for many business owners. While there may be a number of options available, often the more traditional methods, such as bank loans, just don't meet the needs of some businesses. For those businesses the answer could lie with venture capital. Venture capital may sound as if it is out of the SME league, however, depending on the type of business you operate and the reasons why you need additional capital, you may find it is exactly what you've been looking for. Basically, venture capital is another avenue for raising finance for your business. It works well for businesses that possess real growth prospects, coupled with skilled, ambitious management. Here we look at what to consider when it comes to venture capital and what to expect when putting forward an investment proposal. What is venture capital? For many small businesses, the issue of venture capital and how to go about securing such investments can be daunting and often knowing where to start is confusing. Without wanting to over simplify, venture capital is the financial investment into one business or company from an independent outside source, such as another company, firm or specialised venture capital fund. It differs from more traditional finance sources such as banks or lending institutions, as venture capitalists are in the market to take more calculated risks when it comes to their investments. In return for taking such risks, venture capitalists require a higher rate of return on their investment. This means, depending on the individual business arrangement, that the venture capitalist will effectively become a partner in your business, requiring financial compensation in the form of profits and/or shares. A primary reason why investors become involved in the venture capital industry is the investments are expected to provide excess returns above the more traditional avenues. This is why it is important that you are confident when applying for venture capital, that your business will be able to deliver the projected financial result. Once you do secure investment from a venture capital firm, you have effectively entered into a business partnership and the venture capitalist will then also share in the risks and rewards of the business he/she has invested in. Although venture capitalists may receive some return through dividends, their primary return on the investment usually comes from capital gain when they eventually sell their shares in the business/company, which can be typically three to seven years after the investment. As a result, venture capitalists are in the business of promoting growth in the businesses and companies they invest in. In essence, venture capital is big business and is a fairly intense field in which to compete for funds. There are venture capital firms all over the world ranging from private companies to pooled investment funds, superannuation funds and specialised investment groups. Each firm will have a different approach to its investments. Some may look for businesses that are in the start-up phase or that are needing capital to manufacture a new product while others may look to invest in expanding companies or those which specialise in a particular industry. This is why it is important to do your research to make sure the venture capitalist you approach is likely to be interested in your proposal. What to consider when raising venture capital Raising any type of capital needs research and strategic planning. Before approaching any source, you will need to have: · a good business plan with an executive summary; · assessed that private equity is suitable for your business; · analyzed how much finance you require and what it will be used for; · identified those finance sources that meet your requirements. You may also want to consider these questions when it comes to venture capital: · Do you have high growth ambitions for your company? · Are you willing sell some of your company's shares to a venture capital investor in order to be able to increase your stake's value to more than that of your original holding within a few years? It is also worth remembering that venture capital firms will generally only look at businesses that possess real growth prospects, coupled with skilled, ambitious management. The entrepreneur should then draw up a short list of potential venture capitalists and then contact the venture capital firm and request a copy of their publications, which will clarify the type of investments they favour. Advantages of venture capital Raising finance through venture capital is not for everyone. However, if you are considering raising venture capital you may want to consider the following advantages it can have: · The venture capitalist can provide long-term finance which can be a solid base for business growth. Depending on your arrangement, the venture capitalist may also be willing to provide an additional funding boost when required for financial growth. · In essence, a venture capitalist is a business partner, who is sharing the risks and obviously, the rewards. · The venture capitalist can also be a mentor for the business or company in which it has invested by providing strategic, operational and financial advice. · You can also take advantage of the network of contacts the venture capitalist has. This can add value to your business in dealing with suppliers, manufacturers, retailers, etc. It can also be beneficial when looking for co-investment. The venture capitalist is also experienced in the process of preparing a company for an initial public offering (if required) and helping in trade negotiations and sales.
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© 2005 Enterprise Uganda
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