Venture capital funding has become very popular for new-age businesses with no established business model or track record but with a very high potential for return on investment. Typically, these businesses are not entertained by conventional banking and institutional finance channels because they normally represent very unconventional business models that these institutions are unable to evaluate. However, since most people have no first-hand experience in dealing with venture capitalists, there are a lot of misconceptions about how they operate. Some of the most common venture capital myths debunked:
Venture Capital Is Available Only for Developed Businesses
While it is certainly true that venture capitalists are inclined to funding companies that have established that their business model is commercially viable, it is also increasingly seen that a large number of businesses in their very early stages are being funded by venture capital. In a competitive market, funding a company in its early stage when its valuation is lesser allows venture capitalists to achieve a better return on investment. Often using proprietary evaluation techniques for risk evaluation of early-stage companies, venture capitalists try to limit their investment risk and develop very intimate relationships with the founders of the businesses to allow for a better mentoring process that ensures a better chance for the businesses to achieve success. The main attraction of investing in early-stage businesses is that venture capitalists can enter with less capital and exit faster once the ROI has been achieved.
The Main Intention of Venture Capitalists Is to Seize Control of Your Company
There is a popular belief that venture capitalists are just on the lookout for sick companies or companies with a weak leadership that they can take over, replace the existing management, and milk the company to achieve their investment objectives. This predatory attitude is absolutely contrary to what most venture capitalists stand for. The main intention of venture capital funds is to spot investment opportunities with great potential, nurture the business with the infusion of funds and management expertise, and exit as per a pre-defined plan.
Venture capitalists have absolutely no interest in companies that are a step away from turning turtle and they have no intention of destabilizing the company’s existing management. In fact, in most cases, venture capitalists are actually investing in the business idea, and the vision and the drive of the entrepreneur more than anything else. It is possible that the myth regarding venture capitalists taking over management control has arisen because it has become clear to them that the existing management is possibly failing to live up to the expectations and market potential.
There’s No Difference between Angel Investors and Venture Capitalists
Angel investors are typically high net worth individuals who generally invest $25,000-$1, 00,000 in early-stage businesses. Their main intention is to infuse funds and make an exit after meeting their ROI objectives and normally they do not have any advanced industry or management expertise to share with the entrepreneur. A venture capital fund, on the other hand, comprises several high net worth individuals contributing to the corpus of the fund that is typically managed by professionals with specific domain expertise. Venture capital funds can invest several millions of dollars in one business in exchange for shares that they divest by taking the company to an IPO. Businesses that have not yet got to the stage that they can access even angel funding can examine funding options from online lenders like https://www.libertylending.com/.
You Need to Be Introduced Formally to a Venture Capitalist
Most entrepreneurs are so invested in their business idea and the task of raising capital seems so daunting that they can be very hesitant in approaching venture capitalists; who are seen as cold-hearted ruthless sharks only out to make a kill. There is a misconception that approaches will only be entertained if the business owners are introduced by people who are already known to the venture capitalists. While being referred by someone the VC trusts is always good, venture capitalists are open to business proposals from anywhere. However, as they are very busy, they always appreciate that the business owner has done his research before making the approach.
For business owners to increase their chances of being successful, they should first find out if the venture capitalist has any interest in funding businesses of that type; most venture capital funds like to focus on sectors that they understand well. It is very important not to waste your time or the VC’s time in presenting ideas that the fund is not interested in even if it has good investment potential. Instead of sending out template proposals, it is more effective if you carefully craft the letters keeping in mind the expertise and interests of the venture capital fund. Irrespective of the communication channel you use for the first approach; email, social media or a formal letter, you should invariably keep the introduction brief and to the point taking care to explain what you are seeking, and why your business could be an attractive investment destination for the venture capital fund.
Venture Capital Funds Only Give Money Not Add Value
The vital difference between approaching a bank and a venture capital fund is while both give money if they are satisfied with the business model and potential, entrepreneurs can get the advantage of industry and management expertise that the venture capitalists have got with their multiple businesses often operating in the same industry. While venture capitalists will give you the funds, they will also be interested in guiding the management of the company through the various stages of growth and the unique challenges thrown up the environment. It is the access to the expertise and valuable contacts that adds real value to the business and propels it to the higher growth trajectory that is of prime interest to the VC fund to achieve its desired ROI.
Since some common myths about venture capitalists have been dispelled; you should now have a better and unbiased understanding of what they do, what are their expectations, and how your business can benefit by an association with them.