The venture capital community has an image problem. That's right. Most people think venture capital is just for high-tech startups, but it turns out that way of thinking is so very last century.
The real deal is that only a small percentage of private equity (institutional fund investments in mostly privately held businesses) goes to “seed stage” startup entrepreneurs.
Busting VC myths
According to Thomson Reuters, the amount of funds that go to startups is consistently below 10 percent. “Early stage” companies, or businesses that require funds to fully commercialize their products or services, receive about 18 to 25 percent of invested capital.
However, the most robust sector of investment activity is “later stage” and “expansion stage” businesses, which take in about 65 to 75 percent of private equity funds.
Here's another little-known attribute of private equity investing: Whereas startup investors favor technology-oriented companies with the promise of high profit margins and new market leadership, decision-makers in “advanced stage” funds are eager to look at consumer-oriented products and restaurants, service businesses and manufacturing opportunities.
What can venture capital do for you?
I realize business owners often don't explore venture capital because they worry about losing control of their business to investors. They assume the safer way to finance and build their companies is through personal savings and bank debt.
Is this really the smartest, safest strategy? Consider these eight reasons to boost your company's equity base through venture capital:
Protect your personal net worth. Business owners invariably have to personally guarantee bank debt. These contingent obligations reduce business owners' personal credit scores and their ability to get mortgages and other personal credit on the best terms possible. In comparison, venture capitalists assume the entire risk of their investments.
Stay ahead of competitors. Innovation costs money, and when companies become too complacent they make it easier for better-funded competitors to steal customers and market share. What you accomplished yesterday may not be enough to remain competitive tomorrow.
Tap extra dollars. Banks rarely supply more credit to troubled businesses, yet companies that can demonstrate longer-term investment viability can receive multiple rounds of funding from venture capitalists.
Tap extra support. When companies face unexpected problems, the first reaction of venture capitalists is to roll up their sleeves and try to help business leaders solve problems in a collaborative way. Not so with banks, which take a hands-off attitude to helping businesses persevere.
Be more open-minded. If you want to finance tangible assets like receivables, inventory and equipment, then banks are well-suited to your funding needs. However, banks are generally not interested in funding intellectual property, research and development, Internet concepts, or joint ventures.
Maximize cash flow. Higher-debt companies must allocate precious monthly working capital to interest and principal payments. In comparison, less-leveraged companies can re-invest excess cash flow into new products and marketing programs, which can lead to even greater company revenues and cash flow.
Align goals with your lenders. Lenders make money as long as borrowers repay their debts on a timely basis. Investors make money only if the value of a company grows, which matches how business owners make their money.
Follow the leaders. Many highly successful companies that started up during the last 25 years, such as Starbucks, Amazon.com, Google and Facebook, had early help from investors. You can, too.
When business owners fret about losing decision-making control to venture capitalists, I remind them that the purpose of investors is to invest in, not run, companies. That's your job. It's also why every venture capital fund's website lists “management” as part of its key investment criteria.
So do you still think it’s too risky to fund your business with investment capital? Share your thoughts below.