Venture Capital for Small Business Part 3

Should You Consider Venture Capital For Your Small Business? (Part 3)

By George A. Parker

For the fraction of small businesses that qualify for venture capital, this form of financing offers many advantages. Often, two of the greatest advantages are its timeliness and access to helpful non-financial assistance from the investors. These benefits can help catapult small businesses to new levels, allowing them to reach their growth objectives sooner while taking advantage of opportunities that might otherwise be lost.  Let’s assume that your small business has the growth potential, unique value proposition, compelling business plan, proven management team, and other factors described in “Should You Consider Venture Capital For Your Small Business? (Part 2)”.  What should you expect from a venture capital firm that partners with your company?

First, you should be aware that venture capitalists differ widely in their goals and objectives and these differences often express themselves in the way they approach their investments.  For example, some individuals who make venture capital investments on their own (“angel investors”) often couple their investment with a role in the day-to-day management of the companies in which they invest. These investors look for an opportunity to enhance investment returns and ensure business success by offering their own experience, expertise and skills.

Venture capitalists’ investment goals and objectives can differ in other ways, including return expectations, types and degree of management control sought, investment horizons, and shareholder rights/protections. Make sure you understand the key goals and objectives of the venture capitalist with which your company partners.

Another venture capital aspect that reveals a lot about the investor’s expectations is the stock purchase/investment agreement. These agreements are documents negotiated between the venture capital firm and the small business. Most of them include certain common provisions and requirements that address the amount of the investment, whether there is any current payment of dividends, the amount and type of stock the investor will receive, the number of board members that will represent the investor, conditions under which the investor can call for a public stock offering or sale of the company, rights of the investor in the case of company liquidation, and many other rights and terms.

Some stock purchase agreements also outline requirements or “milestones’ that a company must achieve to receive future funding rounds from the investor. In addition, these agreements usually stipulate requirements for financial and management reports. Make sure that you, under the counsel of a skilled attorney, understand all that is required in connection with any venture capital investment and that you are confident that your company can meet these requirements.

Another investment aspect that can vary from one venture capital investor to another is the frequency and type of interaction desired. As previously discussed, some “angel investors” look to participate actively as a part of the company’s management team. Other venture capitalists are satisfied to participate on a company’s board, or in the case of multiple investment firms, one or more of them may elect no board representation. In addition to board representation, some venture capital firms can play important roles in advising, arranging important introductions to potential business partners, providing technical expertise, and helping to recruit key talent to companies in which they invest. When you consider partnering with a venture capital firm, evaluate their ability and willingness to provide these non-financial resources to your firm.

It is very important that venture capital investors are able to adequately monitor their investments. Most of these firms invest in several companies and must quickly and effectively keep track of their performance. Many of these investors rely on financial statements, management reports covering key business metrics, and regular senior management presentations to get answers to questions about business performance and the competitive landscape. With any venture capital investment, expect to report regularly to investors on company performance and to be in a position to discuss performance against previously agreed upon milestones.

These are only a few of the things you can expect when your small business partners with a venture capital firm or investor.  As mentioned, this transformative financing can help a struggling small business jumpstart growth to take full advantage of a unique market opportunity. A good venture capital firm brings abundant growth capital and useful non-financial resources to bear, all with the goal of creating significant equity value for all shareholders. Before you decide to partner with a venture capital firm/investor, carefully evaluate the firm’s strengths and weaknesses. Also, be prepared to communicate regularly regarding performance and to collaborate with the investor to move your company ahead.

George Parker is a twenty-five year industry leader, co-founder and Executive Vice President of Leasing Technologies International, Inc. LTI provides superior financing solutions to venture capital-backed start-ups and emerging growth companies. Visit http://www.ltileasing.com/ to learn how LTI’s innovative equipment financing can help your startup move ahead.

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avatar Posted by on Mar 5 2011 Filed under Featured. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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