Venture Capitalist is a sticky term that seems to be omnipresent in recent years, especially in terms of business arrangements involving tech companies. But what is it and how does it work?
A venture capitalist – frequently also called an “Angel” – is a wealthy investor, pure and simple. These people, or firms, are usually successful entrepreneurs who are willing to bet a large portion of cash on a fledgling business with something special to offer. Generally, venture capitalists are involved in very large investments that typically consist of many millions of dollars. In exchange for assuming the risk and allowing the use of the money, venture capitalists receive an equity stake in the company.
For many small businesses with big ideas, venture capitalist funding is the way to get their vision to market if they lack available funds. An Angel’s investment can be used for anything business-related, but it will be regulated by the venture capitalist through a “term sheet” that dictates what is to be done and when, as agreed upon by both parties.
Venture capitalists are particularly attractive to technology-based companies that may require large sums to manufacture a software or hardware product, for example, or to build infrastructure, hire staff or even more fully develop the idea the business is made around. Facebook is a terrific example of a tiny operation that started out with virtually no money and no employees and was transformed – with the help of an initial investment – into a multi-billion company that revolutionized social media and made the sub-industry a household name. Talk about a Cinderella story.
Maybe you’ve got an invention or an idea for the next hot ticket and all this talk has you salivating for some venture capitalist funding of your own. There are a few steps you will need to take in order to have a chance at receiving any support.
Here’s what you need:
A really big idea. But it can’t just be a grand notion. It has to be something that will make money and a lot of it. Venture capitalists are in it for the payout, so if they don’t see financial gain on the horizon, they won’t be interested.
A knock-your-socks-off pitch. The great idea is only the start. Then you must develop it into a business plan that can be explained thoroughly to assuage any concerns the investor may have initially. You will need to think quickly and be able to improvise during the presentation. In most cases, the initial meeting can go very quickly, so make sure the presentation has immediate impact.
Contacts. If you don’t know the players it will be difficult to get a meeting. Some firms do welcome initial email proposals and this may be a sufficient entry point for some. Connections can also be made through seasoned lawyers, successful business people such as CEOs and entrepreneurs and other similar types of people. Shake the bushes and see who might be in your circle of influence and able to help.
A lawyer. Taking on the support of a venture capitalist is an important endeavor and should be treated with all the caution and due diligence afforded any major financial transaction. Get everything in writing and make sure a lawyer reviews all documents – particularly the term sheet – prior to signing.
Luck. It always helps.
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