Attract The Perfect Investor For Your Business

by Ted Wooley

Traditional Venture Capital

The phrase ìtraditional ventureî refers to the established firms that
pool money from many sources for the purpose of pursuing high-risk,
high-profit investments in young companies. The strategy employed by
capitalists here is to find companies poised for explosive growth. Once
found, they will purchase from 20 to 70 percent of the companyís equity.
Most do not want to participate in the daily control of the company, but
rather act as advisors to steer the company in establishing its niche.
The exception would be if the ownership was incompetent; then, the
investors would naturally look to assume control to protect their
investment.

Venture capitalists seek high-risk investments, and as such, investors
realize that most of their gambles are not going to pay off. This means
they need to see realistic (in their mind) projected returns of 5 to 10
times their investment in just three to five years. If all works well
for the firm, the 10 to 20 percent of companies that are outstanding
successes makes up for the losses on the remaining percentage.
Historically, this formula has provided venture capitalists with overall
annual returns of about 25 percent.

In addition to this high return, most venture firms want to be out with
their investment and profits in 3 to 5 years. This is accomplished via
an exit strategy. Virtually no investor, whether firm or individual,
wants to get married for life. The maximum potential for profit, as a
percentage, is during the early years. Once that window has narrowed,
they will want the money back to start again somewhere else. The
exception to this would be for second and third stage funding.

An estimated $3 billion is committed annually through the hands of these
investment financiers. The minimum amount these firms are willing to
invest can be as little as $50,000, but most look for higher amounts,
with many starting at $500,000 or more.

As with most forms of capital, access is largely dictated by the current
economy. Some prefer to provide seed money for start-ups, while others
focus on later stages of funding or leveraged buyouts. Some firms only
focus on specific industries or geographic areas. All firms will provide
you with a ìfact sheetî with information about the types of businesses
they have financed in the past.

Qualifications and competition are stiff for venture capital. Here are
some key areas these investors consider:

Management

The key here is ìTEAM.î They want to see a well rounded management team
with experience in all areas of business, including marketing,
administration and manufacturing. Each key player should head a
different area of the business. The ideal team has 3 or 4 players.

Product

The most attractive products are ones that already have an established
market, but are one or more years ahead of competitors. This competitive
edge can be derived from innovations in design which make it superior,
or innovations in manufacturing which make it cheaper, or, as is the
trend lately, innovations in marketing.

Return on Investment

Traditional capitalists donít want a long-term relationship. They want
to fund your start-up or growth in exchange for equity (a lot of
equity), then sell that equity for a huge profit when the company is
more valuable in 3 to 7 years. There are two ìliquidity eventsî by which
your investors can convert equity into cash. One is by selling out to
the management team (you). The other is to take the company public and
sell their shares through the market. Your growth projections will need
to make this feasible.

Private Venture Capital

Realistically, only a small number of the individuals reading this
article are viable candidates for venture capitalists. The vast majority
are better suited for the community of individual venture capitalists
known as angels.

Angels are responsible for financing about 95 percent of all start-ups
that receive outside funding. They have the most diverse resources.
Angels have individual standards, preferences, understanding and
objectives. Spend enough time with these people and you will know that
there an angel for everyone.

Why Angels Take Risks

Profit is not always the primary motivation. If you can discover an
angelís underlying desires, you can greatly improve your odds of closing
the deal by building on those points most important to him or her.
Motives might include:

Ego ñ Their desire to own part of a highly visible business.

Sense of Obligation ñ Their desire to help someone else make it; often,
as someone once helped them.

The Excitement ñ Their desire to escape the boredom of their job and the
rush from seeing a high-risk investment hit pay dirt.

Community Development ñ Their desire to see more jobs or beneficial
services brought to the community. HBM

Lecturer and author Ted Wooley also serves as president of the Horizons
Unlimited Group, a seminar/publishing company he helped found in 1987.
HUG’s popular line of resources know as the “Insider Reports” is
tailored to fill the personal and business financial information needs
of the budding entrepreneur. Visit HUG’s web site at
www.InsiderReports.com for 1,200+ free small business reports or call
888-985-8585 for a free catalog.”

Originally Published at http://www.homebusinessmag.com/

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SMBReviews is committed to providing small and mid-sized business owners with the information and resources they need to select the best service or product for their company.

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