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VENTURE CAPITAL

Venture Capital - ("risk capital" or ‘unsecured risk financing’ or ‘development capital’) is a source of financing for new businesses.

Venture capital’s risks:

- management risk (inability of management teams to work together);

- market risk (product may fail in the market.);

- product risk (product may not be commercially viable);

- operation risk (operations may not be cost effective resulting in increased cost decreased gross margins).

Venture Capitalist is a wealthy investor who provides capital (more than $ 1 million) to start up ventures or supports small companies that wish to expand expecting higher returns for the additional risks taken.

Venture capital firms are small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience raising capital from institutional investors(pension funds and insurance companies).

Required documents for attracting venture capital:

- Business Summary. It is a brief statement covering the main points that includes a discussion of management, profits, strategic position, and exit plan.

- Business Plan. A detailed document that outlines what you are going to do and how you are going to do it; the management team (including full resumes; business strategy); marketing plan (sales projections, distribution, market, and competition; financials) and a competitive analysis.

- Due Diligence. The due diligence review aims to support or contradict the venture capital firm's own initial impressions of the business plan formed during the initial stage.

- Marketing Material. Any document that directly or indirectly relates to the sales of your product or service.

Angel investor (private investor) is an individual who provides a one-time injection of seed money or ongoing support to the entrepreneurs to get their business off the ground.

Angel investors can provide the basic capital for a new business in return for:

- Capital in exchange for equity shares;

- Stock options;

- Assistance of associates.

Advantages of business angels:

- flexible business agreements;

- angels can bring forth vast knowledge and experience to a new company;

- angels do not require high monthly fees;

- their community involvement;

- angels are located everywhere, practically all industries.

Disadvantages of business angels:

- can be deceptive;

- can be costly;

- active company involvement can lead to problems;

- do not have national recognition.

The Stages in Venture Capital (VC) Investing:

1. Early stage finance:

· Seed capital - the financing of the initial product development or capital provided to an entrepreneur to prove the feasibility of a project and to qualify for start up capital

· Start up capital – a capital needed to finance the product development, initial marketing and establishment of product facility

· Early/First stage capital - finance provided to companies that have completed the product development stage and require further funds to initiate commercial manufacturing and sales but may not be generating profits

· Second stage capital – capital provided for marketing and meeting the growing working capital needs of an enterprise that has commenced the production but does not have positive cash flows sufficient to take care of its growing needs.

· Later/Third stage capital – capital provided to an enterprise that has established commercial production and basic marketing set-up, typically for market expansion, acquisition, product development.

2. Later stage finance:

· Expansion/Development stage capital – is funds for new or larger factories and warehouses, production capacities, developing improved or new products, developing new markets or entering exports by enterprise with established business that has already achieved break even and has started making profits.

· Replacement finance – a substituting one shareholder for another.

· Management buy out and buy ins – acquisition financing.

· Turnarounds – funds for turning around a sick company.

· Mezzanine/Bridge finance - the pre-public offering or pre-merger/acquisition finance to a company.