Article: Venture Capitalists - An Alternative to Lenders?


	Lynn Westergard

Venture capitalists an alternative to lenders?

If you have an attractive company or product, and if you’re willing to play by someone else’s rules, venture capital may be your key to success

Venture capital is invested in closely held companies in exchange for a percentage ownership for the venture capital firm. Companies that attract venture capitalists enjoy significant benefits that are rarely gained through other methods of raising capital. First, venture capital fills the gap between what a business still needs after it has exhausted its credit facilities.

In addition:

There is usually no need for asset security or owners’ personal guarantees.
Venture capitalists tend to look to back-end capital gain, rather than dividends, as their primary source of return.
The use of venture capital allows businesses to grow faster than if they were reliant on debt or retained earnings.
Venture capitalists tend to specialize in certain industries. Their knowledge of technological advances, markets, competitors, suppliers and other aspects of a given industry is a valuable resource to the companies in which they invest.
The venture capitalist can help negotiate credit terms with suppliers and put other forms of financing in place.

Realities. If venture capital seems like the answer to your company’s needs, you should be aware of the limitations and requirements inherent in dealing with a venture capitalist.

High rejection rate. No more than one or two percent of companies that seek venture capital are able to secure it. This is because most venture capitalists are picky: While they are more willing than lenders to furnish seed money, they usually want the company founder to have a solid track record of success, both in his field of expertise and in managing a business.

Loss of control. Your initial vision for your company probably did not include having your money man sitting on your board, telling you what to do and generally calling all of the shots.

Outside pressure. While the role of the venture capital group includes providing business development expertise, its performance is measured by how much and when it returns money to its investors (often insurance companies and other institutional investors) from the venture capital fund. They therefore face pressures that will directly affect you and your company.

High return required. Most venture capitalists need to see potential returns as high as 15 to 20 times their money for the earliest, and most risky, investments they make. If your company is in its start-up phase, you represent a much higher risk than does a business that’s already up and running. To back your fledgling company, a venture capitalist will demand a high rate of return and a higher-than-usual percentage of ownership.

Larger companies preferred. Most venture capital groups rarely invest in small businesses. Your restaurant or store may offer reasonable returns to many investors, but most venture capital groups need to see the potential for greater returns.

How to do it. If, after considering the benefits and roadblocks described above, you consider venture capital to be a viable resource for your company, you should be prepared to confront the following issues:

The right match. There are thousands of venture capital firms doing business with American companies. Each has its own personality, and you should try to match your needs with investors’ skills, interests, industry orientation and market niche. Some venture capitalists provide seed money for early-stage situations, while others have expertise in later-stage transactions.
The right numbers. Persuading a venture fund to invest in your business requires a detailed, accurate, well-written business plan — and that’s just for starters. Qualifying for venture money means you need to have a business idea or plan that meets an investor’s likely growth requirements, so that a venture capitalist can see how to make money by investing in your deal.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.