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How Venture Capital Firms Work: The Business Owner's View
When a new business is just starting up, they often run out of capital quite quickly. In order to grow, the business needs to seek financing. This is where venture capital firms come into play. These firms invest some of their funds, or money from the individuals that invest with them, in the new business. Here is how this process works.
In order to get money form a venture capital firm, the business first needs to find a firm who works in the particular industry where their business is found. Then, the business presents the firm with a business plan. If the venture capital firm is impressed with the business plan, they will make the decision to invest in the company. This does not mean that they give the company a huge lump sum to use. The investment is usually given in three or four rounds. The first round is called seed money.
In return for the investment, the venture capital firm usually wants to have a say in how the business is run. They will become part owners in the business, often through stocks they are given by the company. Also, many companies will put a member of the venture capital firm on their board of trustees or board of directors. There may be certain stipulations placed on the business by the venture capital firm. For example, the business may have to get the venture capital firm?s approval for expenditures over a certain amount.
While this level of control might seem too much for many entrepreneurial minded individuals, the company who has an investment from a venture capital firm is given much more than just money. Because the venture capital firm only invests in one particular industry, the members of the firm have expertise about that industry that is invaluable to a new business owner. Also, they have important contacts at all levels of the industry that the new business owner can take advantage of.
Of course, the most important part of the relationship between the venture capital firm and the new business is the money that exchanges hands. Again, the venture capital firm may want to have a say in how that money is spent. Because they are on the board of directors for the new business, they can have some control of the expenditures of the business.
The alternative to this type of control is typically to not have the funding needed for the business. Even though many new business owners do not like having a venture capital firm on their board of directors, they often see it as the only way to fund their business. And the experience of these firms ends up being a valuable part of the business as well!
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