Venture capital and IT startups - Launching of Small Business

Venture capital

Venture capital (VC) is financial capital provided to early-stage, high-potential, growth startup companies. The venture capital fund earns money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology and IT.

Venture capitalists (VCs) represent the most glamorous and appealing form of financing to many entrepreneurs. They're known for backing high-growth companies in the early stages, and many of the best-known entrepreneurial success stories owe their growth to financing from venture capitalists.

VCs can provide large sums of money, advice and prestige by their mere presence. Just the fact that you've obtained venture capital backing means your business has, in venture capitalists' eyes, at least, considerable potential for rapid and profitable growth.

VCs make loans to--and equity investments in--young companies. The loans are often expensive, carrying rates of up to 20 percent. Many venture capitalists seek very high rates; a 30 percent to 50 percent annual rate of return. Unlike banks and other lenders, venture capitalists frequently take equity positions as well. That means you don't have to pay out hard-to-get cash in the form of interest and principal installments. Instead, you give a portion of your or other owners' interest in the company in exchange for the VCs' backing.

The catch is that often you have to give up a large portion of your company to get the money. In fact, VC financiers so frequently wrest majority control from and then oust the founding entrepreneurs that they are sometimes known as "vulture capitalists." But VCs come in all sizes and varieties, and they're not all bad.

Venture capitalists typically invest in companies they anticipate being sold either to the public or to larger firms within the next several years. Companies they will consider investing in usually have the following features:

·        Rapid, steady sales growth

·        A proprietary new technology or dominant position in an emerging market

·        A sound management team

·        The potential for being acquired by a larger company or taken public in a stock offering

In addition, venture capitalists often define their investments by the business' life cycle: seed financing, start-up financing, second-stage financing, bridge financing, and leveraged buyout. Some venture capitalists prefer to invest in firms only during start-up, where the risk is highest but so is the potential for return. Other venture capital firms deal only with second-stage financing for expansion purposes or bridge financing where they supply capital for growth until the company goes public. Finally, there are venture capital companies that concentrate solely on supplying funds for management-led buyouts.

There are several types of venture capital:

Private venture capital partnerships are perhaps the largest source of risk capital and generally look for businesses that have the capability to generate a 30 percent return on investment each year. They like to actively participate in the planning and management of the businesses they finance and have very large capital bases--up to $500 million--to invest at all stages.

Industrial venture capital pools usually focus on funding firms that have a high likelihood of success, like high-tech firms or companies using state-of-the-art technology in a unique manner.

Investment banking firms traditionally provide expansion capital by selling a company's stock to public and private equity investors. Some also have formed their own venture capital divisions to provide risk capital for expansion and early-stage financing.

The way to contact venture capitalists is through an introduction from another business owner, banker, attorney, or other professional who knows you and the venture capitalist well enough to approach them with the proposition.

IT startups

Being an entrepreneur is tough. Having your startup make it past year one is even more so and generating revenue can at times seem next to impossible. So, for those startups that have successfully gotten over these humps and made it look easy.

There is additional encouraging news for aspiring entrepreneurs on many fronts, just in case you are thinking about joining the existing ranks:

1.     Valuations of successful startups have hit an all-time high.

2.     Initial Public Offerings (IPO) are back as an exit strategy.

3.     Funding for early-stage startups is more available than ever.

4.     Cost of entry for a startup is at an all-time low.

5.     Startup incubators and accelerators are popping up everywhere.

6.     The world is a now single market, both homogeneous and heterogeneous.

7.     Social media is a boon for entrepreneurs and startups.

8.     Large corporations have lost their ability to innovate.

9.     Entrepreneurs.

10.                        Baby Boomers are joining the fun in record numbers.