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Funding The Start Up Business – Venture Capital Definition

Funding The Start Up Business or Expanding Your Business – Venture Capital Definition

A useful venture capital definition requires some small amount of context regarding the small business funding markets in the U.S.

Many entrepreneurs think that making the rounds of all the local and regional banks is the best way to fund their start-up small business or to finance their small business expansion. In fact this method works to some extent. In the U.S. we have the most efficient and productive capital markets in the world. This includes stock and bond markets.

But for the small business start-up the most important capital markets are the private capital markets or, those also known as, ‘risk capital’ markets. These sources of funding for small start-ups have evolved over the last several decades from a handful of wealthy individuals thought of as the ‘cowboys’ of finance investing, at least by the traditional Wall Street and Main Street funding sources, to today representing Trillions of dollars in funds sourced from thousands of places – including pension funds, institutional investors and conservative individuals. This is the context for the new venture capital definition.

Today the ‘cowboys’ of small business investing are more into the category of ‘angel investors’. These are where the very eccentric and individual money tends to go.

How Much Control Do You Want To Give Up To Get Financing?

The attraction for these new venture capitalists is of course profit. The yield earned from their investments is quite high due to the unique risks to that capital in funding start up small businesses.

The venture capitalist definition of return on their money begins at the 25% mark. They mostly require an equity stake in the company in exchange for the funds to start-up or expand the small business. The venture capital company (VC) will also want an active role in the company management and seats on the board. Also, the VC firm will want to be able to cash out it’s investment in just a few years. This is accomplished through another round of financing where the VC firm sells it’s shares at a profit or the company is able to go public and raise more capital while giving the VC firm a ready market to sell its existing private shares of the business.

All of these activities will reduce or dilute the entrepreneur’s ownership of the small business. This dilution eventually can result in the small business owner having less than 51% of the shares and be in a minority position in his or her own company. This not necessarily a bad position to be in, but many of those who have been there did not like the experience or the outcome. In the worst case they can be removed altogether from the company they founded.

It is extremely important to for the entrepreneur to fully understand the contracts presented and not be dazzled by the prospect of the money. Your Business Mentor Ray strongly recommends the use of your small business accountant and small business lawyer in this funding process.

Many businesses do quite well using a bootstrapping approach to financing their business, while retaining 100% control. Of course the VC ‘s of the world would say, do you want 100% of a business worth $100,000 or would you rather have 30% of a business worth $10,000,000.

This is something only you can decide after you gather all the facts, make your assessments and really think through where you want to be in 3 to 5 years. All the work- life balance and family commitments issues must be weighed out. The average entrepreneur works 80 or 90 hours a week and even in the down time stills deals with the pressures of meeting payroll and satisfying demanding customers.

Your Business Mentor Ray welcomes your comments and questions on the article - Funding The Start Up Business – Venture Capital Definition

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