Private Venture Capital – How to Get on the Fast Track to Startup Success
Where can entrepreneurs and start-up companies go in search of capital for their businesses? Traditional lending is an option, but many new business owners do not have enough established credit, collateral, or experience to qualify for an institutional loan. Finding traditional partners or offering stock from an unproven company have their shares of disadvantages.
However, if your startup is poised for high growth, private venture capital firms are ready to help give you the funds you need to make your business dreams a reality.
What is Private Venture Capital?
Private venture capital is a source of funding for qualified entrepreneurs who have an innovative idea for a startup endeavor. Private venture capital is usually derived from private sources, or investors, who contribute money into a venture capital fund. The firm then decides how it wants to distribute private venture capital funds into certain types of startup businesses, such as high tech, software, or medical technology.
Since startups and new businesses are yet unproven and a risky investment, private venture capital funds have a strict approval process. Only the most organized businesses with the best ideas and the most qualified group of leaders usually make the cut.
How Private Venture Capital Firms Can Help
New startups with a firm business plan and reasonable financial projections can get plenty of help from a private venture capital firm. There are two major ways that private venture capital firms can get a startup going strong and successful:
- Invest Capital – Money is the lifeline of business. New businesses, especially in industries with high barriers to entry, need funding to grow. Private venture capital firms are not looking to invest a few hundred thousand dollars to help a business. Rather, they are expecting to help new startups with capital injections in the millions of dollars. Private venture capital amounts of $5 million to $20 million are not uncommon. Generally, any startup that needs less than $3 million should look to angel investors, not venture capitalists.
- Provide Helpful Expertise and Guidance – Private venture capital firms are in the business of helping new companies succeed. In addition to funding, venture capital firms will take roles within the particular organization, such as sitting on the board of directors. A private venture capital firm may assist with important issues such as marketing plans, market research, R & D, and IPO.
What Do Startups Give Up For Private Venture Capital?
Because of the high risk involved with startups, private venture capital does not come without a high cost. It is not uncommon for private venture capital firms to require an ownership interest of 30%, 50%, and even a majority partner interest in a startup. A startup can also bet that along with a large ownership interest in the business, private venture capital firms will also require to be involved in all major business decisions – meaning that a degree of control must be relinquished.
In addition, along with a large ownership interest, a private venture capital firm will have first rights on any purchase of common stock and preferred stock if a startup has plans to go public with an IPO.
Entrepreneurs and startups with a firm grasp on the reality of their future business success can realize their dreams through private venture capital. Though this type of business financing may come with a cost, it is one of the best routes for new businesses to find their ultimate success.