One of the most talked-about forms of financing, venture capital was popular in the nineties. Venture capitalists raise money from investors in order to manage a portfolio of privately held companies. In short, they are intermediaries. Venture capitalists fund companies that are in early-stage development, expansion, or for special cases such as turnarounds or leverage buyouts.
According to the National Venture Capital Association (www.nvca.org), venture capitalists look to:
- Invest in new companies or in companies that are experiencing rapid growth.
- Buy equity securities.
- Help companies develop products and services by contributing experience or capital.
- Advise a company’s management on business operations and strategy.
- Gain higher returns in exchange for taking a higher risk on their investments.
Venture capitalists tend to have a long-term outlook and take more risks than other types of financiers, such as banks. They manage that risk by investing in portfolios of young companies either by themselves or with other venture capital funds. Moreover, they actively work with the companies in their portfolio, assisting management with strategic decisions and business expertise gained by helping other companies with similar problems.
Is Venture Capital Right for Your BusinessIf you are willing to report to a board of directors, bring partners into your company, share in governance and decision-making, then you might wish to consider venture capital. When considering such funding, know that you will lose some control and ownership over your company in exchange for financing, connections, speed to market, and business experience from the venture capitalist.
Can you Deal with Not Being the CEO of Your Company?
Usually the CEO founder of the company does not have all the skills to take the company to the next level, whether it is a merger of acquisition or an initial public offering. Many founding CEOs are very skilled in some areas—perhaps technical or entrepreneurial—but lack in financial, sales, marketing, or other areas of experience. Venture capitalists usually have a network of people from many industries that can take the helm of a company. These people have risen through the ranks in other companies and have extensive experience in different areas of business management. Venture capitalists as well as entrepreneurs must clarify all contributions to the deal and skills brought to the table. It may be to everyone’s best interests for you—as the entrepreneur—to step down from the CEO position.