Contrary to what you are seeing in the press with the credit crunch and looming recession there is simply too much money in the World at the moment; too much capital seeking too few investment opportunities. Remember the 1930s depression created more Millionaires than in any other era (ever) and now will be no different. A large amount of high net worth individuals are seeking to diversify their portfolios away from traditional investments as a defensive hedge against stock market volatility. Historically and in times of recession the two best investment classes that have outperformed traditional markets have been commodities and private equity. So if there is so much capital available in the world today, why is it so difficult to locate the capital you need?
The most probable answer to your question is that the amounts you are seeking are way too small to tempt Venture Capitalists or Hedge fund managers. After all it is relative. If a VC has tens of millions of pounds to invest into private equity why invest into 100 or 200 start-up companies? Who could possibly manage and foresee all of these investments and entrepreneurs? Its hard enough to manage one sometimes! So relatively speaking, investing in you would most-likely prove cost-prohibitive for them even though arguably they would receive more value overall.
The Hunt - VCs vs Angels
Venture Capital firms are one way to raise a serious amount of capital but as you may imagine there are pitfalls. The main one being loss of equity far beyond the 51% mark. Further the final vote on 'the right of sale' will also most probably be a mandatory right for them. Since VCs main motivation is 'ROISAP' (return on investment soon as possible) VCs will always have a frantic desire to flip every deal as quickly as possible. And they will not care where that return comes from, yourself or an outside party as long as they receive a massive bonus for the risk and skill for what they have invested.
More appealing to an entrepreneur starting-up is to seek a business angel investor interested in the line of work you are involved in as they will either take an equity position and some level of debt (or typically a combination of the two) in exchange for their investment. They will also take a seat on your board of directors, which they will use as a platform to monitor their investment and to provide invaluable advice. Sometimes they can actually take an active role in the organization and get it kick started into high gear. This freedom can afford an organization the ability to swiftly hire key employees and develop its business model to the point where it is ready to seek larger scale, second-round financing at a much more reasonable cost-to-equity due to the proven track record within the organization.
Other benefits to the entrepreneur include access to the expertise and business networks that the angel investors may be involved with. In addition to this, the growing trend of angel investor syndicating means that an individual entrepreneur can raise significant capital (significantly above the £500K mark) in a single financing deal without the need to negotiate separately with each investor.
Health Warning:
Venture capital money is not for the faint-hearted. Too often, it is only for the desperate - unless your desire is to build a business with an exit strategy in mind from day 1. There is nothing wrong with such a goal in the short term, as the returns can be staggering, but expect to make them many - many more millions than your side - that is if you even get that far. A great many other original creators have been squeezed out long before the 'D-day - big pay day'.
Angel investment therefore represents an invaluable source of alternative funding. And one that is far more attractive and realistic for a start-up entrepreneur. Benefits for both the Entrepreneur and the Angel can be great provided of course that the expectations are well drafted and thought out from day one and the funding agreement is structured to meet the demands of both sides.
The main difference between a business angel and a venture capitalist is that VC funding will come with legal agreements that will be inevitably always be Venture capitalist biased with terms that almost are utterly unfair and unjust, whereas, Angel investment will be far more flexible. It's not uncommon for some Angels to even shy away from using corporate solicitors when drafting agreements for funding. The reason being that if a high net worth individual should choose to invest in 8 - 10 companies, the total legal bill could turn out to be over £50,000.00 (assuming a lean estimation of £5K per company which is low!) - money that could be used to fund crucial working capital or further expansion.
Executive Summary
Receiving successful venture capital funding can provide a lot more than just money to the start-up. They can bring a wealth of managerial talent and experience that can advise you on external growth and how to jump over major pitfalls.
This professional advice can be a massive boost for a young company looking for every competitive edge. Another major benefit of VC Capital is that their network of contacts could end up making all the difference in a successful exit (or not).
But always remember what being funded by a VC actually means. After they have invested millions into it and regardless of whether or not they actually hold a controlling interest in your company they will be in control of your organization and will have a lot of power over how the company runs and how they will get their money out. You will be forced to go down directions that you may not be too happy with.
The Plan
More often then not, it's best for an entrepreneur to start up on their own or with the help of an Angel Investor (or syndicate if the investment requirement is too large to be funded by one individual). After running and evolving the business, the next best course of action is turn to VCs when you believe you are ready to take your company to the next level and will need a serious amount of capital to do so. Before even considering approaching a VC, you will have to demonstrate that you have a degree of success in your past, which is where the first round of your funding and management of your cash flow will come in handy.
When you do decide to approach venture capitalists and if by some miracle should they agree to back you, then it will be crucial on your part to seek-out the best legal advice that you can afford for the ensuing negotiations. One sentence or even a phrase within the initial contract can determine your success or failure. VCs are consummate professionals, and you will have to become one before playing in their league.
Original Article: http://EzineArticles.com/2748321
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