ventures

Do You Need More Money for Your Business Idea?

OK, so you have an idea for a business, you emptied all your savings, borrowed all the money you could from your friends and family, but you still do not have enough funds to get your idea off the ground. Well, do not be dishearten, there is light at the end of the tunnel.

What light am I talking about? I’m glad you asked. The light I am referring to is called venture capital or private equity (cue the horns and harp music). Yes, if you are really passionate about your idea, and you have a detailed plan (preferably in a business plan format, not on the back of an envelope) on how you want to bring that idea to the market, venture capital may be the next step.

Before you react, let me give you a quick overview on what a venture capital or private equity firm actually is, and how to get money from them. Now, I am going to explain this under the impression that you have never heard of venture capital or private equity before.

First off, venture capital is NOT a new park at Disney World next to the Epcot Center (its ok you can laugh). But all jokes aside, venture capital in a simple sense is a way for individuals or firms with a whole lot of money to pool it together and invest it in early-stage, high-potential, growth companies that will in turn generate the investors a profit in the near future.

An example: Say I wanted to start a lemonade stand, and for whatever reason your two friends thought it was a wonderful idea. So wonderful that they said they would give you all the money to get started. You are super excited, because now you can use that money to buy supplies, material for the stand, and get a cool sign printed up at Kinkos. Your friends only had two conditions, you pay him 10% of all the profits on sales, and after the summer is over he wants a 25% return of the money he gave you. You agree to the terms, and your business is born.

Like in the example above, the friends who gave you the money would be considered the venture capitalists. They had the funds to invest in your idea, and they wanted a return on their money within certain time constraints.

So now you know a little bit about what a venture capital firm does, now you need to know how to get the money you need from them. Before you even approach a venture capital or private equity firm you need to do your homework on the firm. By homework, I mean you need to know what does this firm invests in and who do they usually give money to. Below are six questions that you need to know the answers to before you sit down with a venture capitalist.

1. Business Cycle: Do they like investing in brand new start-ups or established businesses?
2. Industry: What industry do they like to invest in? What is their focus?
3. Investment: How much do they usually invest in a company? Does that amount meet your needs?
4. Location: Are they regional, national or international?
5. Return: What is their expected return on investment?
6. Involvement: What is their involvement level? Are they hands on or do they allow management to run everything?

Once you know the answers to these questions you can begin to search for the right venture capital or private equity firm to invest in your idea. This is the first step.


Discussion

One comment for “Do You Need More Money for Your Business Idea?”

  1. I’ve used that “light at the end of the tunnel” analogy so many times I thought I had the sole rights to it 😀

    Thanks so much for the VC info. I’ve been seeking a really good definition and outline of what they do. Your’s has been very easy to read.

    Thanks! I found you on Twitter.

    Posted by Gail | May 19, 2009, 11:54 pm

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