Grow Your Business with Venture Capitalists

Venture capital is a term referring to the funding secured by investors for small businesses and startup companies with long-term potential for growth. Venture capital is a major source of financing for startup enterprises that have a limited access to the capital markets or a limited operating history. The risk is higher for investors but the return potential is above the average. In addition, venture capitalists assist companies in terms of generation of ideas, startup, ramp-up, and exit.

Venture capital can be in the form of technical or managerial know-how. A large portion of the capital comes from investment banks, wealthy investors, and various financial institutions. The downside of obtaining such capital is that investors typically have a say in the decisions of the company as well as a portion of its equity. Venture capital is good for companies that are unable to obtain business loans or to complete a debt offering. Venture capital is used to evaluate the extent to which innovations are introduced in various economic sectors. It is associated with the knowledge economy and job creation. Naturally, venture capital is important for the Canadian business. While the established big players can access the global markets, most of the private-owned Canadian companies are not large enough to compete on the US or other world markets. Bank loans are not always the best solution for the financing of ventures in their early stages, especially in some economic sectors such as the high-tech industry. At the same time, companies face some major challenges, and the venture capital environment in Canada is not as robust as that in the USA. Brain drain remains a concern as well.

When starting a new business, entrepreneurs need financing to purchase machines, equipment, furniture, supplies, etc. They also need money for employees’ salaries. The standard sources of funding are bank loans, personal savings, and bootstrapping. All three have their limitations unless the entrepreneur is already running another successful business or has considerable savings. Venture capital is another solution. Venture capitalists fund many Dot Com firms, but they are funding other types of businesses as well. The standard approach of a venture capital company is to open a fund. This fund represents a pool of money that the firm will invest. Then, the venture capital firm starts gathering funds from companies, wealthy individuals, pension funds, etc. A fixed amount of capital is raised in the fund, e.g. $50 million.

The company will invest this amount is a number of business entities. Every fund and firm has its investment profile. For instance, a fund may invest only in Dot Coms or biotech startup companies. As an alternative, the fund may opt for a mix of companies that intend to do an initial public offering or IPO over the next six months. The profile chosen by the fund comes with certain rewards and risks, but the investors are informed of them before they invest any money.

Usually, venture capital firms invest the whole sum in the fund, expecting the investment to liquidate in three to seven years. The company expects that all businesses it has invested in will be either acquired or will go public. In other words, they will sell shares on the stock exchanges. The cash flows from stock sale to an acquirer or to the public allow the venture capital company to cash out, placing the proceeds in the fund again. The aim is to make more than the original investment. Then, the money is distributed among the investors based on their contributions to the fund.

Examples of well-known companies, which have used venture capital, are Intel, Google and Apple. The famous Google received equity funding from Sequoia Capital and Kleiner Perkins Lead Investment in 1999. The VC firms usually offer their know-how and industry contacts, on top of the capital they invest in a company.