Raising Capital Through Venture Capitalist

Raising Capital Through Venture Capitalist

In order to be able to evaluate the advantages and disadvantages of financing through venture capital in the conditions provided, one needs to understand exactly what venture capital is and how it works and to determine how a financing through venture capital will be able to impact the course of actions within the company in the subsequent period of time, as compared to the strategic objectives that the company has set for itself in the future.

As such, venture capital is "an option available to businesses that do not meet lending standards required by banks or other traditional lenders." Given the conditions provided, it is difficult to believe that the company is in a situation where it cannot reach the standards imposed by traditional financing institutions. The company has a sustainable growing rate and a strategic plan for the following five years, including estimates of what investments should be in this period of time.

In my opinion, we are in a different situation here, a situation that makes financing through venture capital the best option. As we have seen, the estimated financial needs for the following five years are $25 million dollars. This is an amount large enough to make many institutions ponder and decide that the risk around such a sum of money is much too large. Or, in this case, this is one of the greatest advantages that venture capitalist provide in a financing deal: they are not the individuals to turn away from risk.

On the other hand, venture capitalists are not to be regarded as hazardous businessmen who will tend to lend before analyzing. There are several conditions worth looking over before deciding on a venture capital financing.

First of all, it is difficult to simply contact a venture capitalist, propose a deal and allow him to decide on the financing. While financing methods such as bond issues or common stock issuing have an applicable and decided upon methodology, a methodology where the borrower needs to fulfill several steps and conditions in order to be able to gather the money, a venture capitalist is often likely to ignore a project, even if viable, unless it is recommended by a trusted source. This means that the first step in going into a venture capital financing deal includes contacting the right people, investing into getting to know these circles and improving the company's reference, all more difficult than simply going to the bank and asking what the steps are for a bond issue.

Assuming that the contact has been made and that the venture capitalist has been contacted, the actual brief that our company will be providing is essential. Given this case, the growing figures, for example, are something likely to have a positive impact on the venture capitalist decision. Indeed, the company is growing at a 30% annual rate and in the four-year time period, form the founding of the company to present-time (2001-2005), the company has grown with a steady and encouraging 185.5%. These are figures that will impress a venture capitalist, for a venture capitalist is not entering any deal to make money in the long run, but rather to have swift and substantial gains on the money invested.

On the other hand, this is not enough. The brief needs to include reference to almost all the aspects and activities involved within the company. This includes a substantiated management plan and management team, on all areas of the company's activity, starting with the strategic planning and management and ending with the human resource management. This is one of the issues to be considered in the case of a venture capital financing: the investor is likely to supervise extremely close the entire business process into the future, until he recuperates the investment and the profit he intends to make on his investment.

This brings us to two important issues to be referred to. First of all, because of the mechanism that a venture capital financing implies, the investor will have an important say in the way the company is run in the future. In other words, the company is likely to become a consumable and to be treated as such, so that one needs to "forget the passion, forget the good-for-the-world approach." The investor will have a say in the company's recruitment process, in fees and remuneration (generally speaking, in the way money is spent within the company), in the projects the company decides to follow upon (and especially in deciding whether these will be followed upon) etc. All these for one reason: the company has become a "consumable" and, as such, it needs to be a product that will bring the highest profit for the venture capitalist. It is not unlikely that he will often impose an outside CEO to manage the business and direct towards the targets that need to be reached. It is also quite probable that the venture capitalist will leave a significant impact on the overall strategic goals of the company and even on the company's mission. The involvement of the venture capitalist in the way the company is run (even if only by naming a person responsible for this) is to be considered one of the important disadvantages in making this decision.

The second possible disadvantage we should have a look at is the fact that a venture capitalist investing in a company will most likely looking, from the very beginning, for a way out of his investment, most probably, for an exit plan that will allow him to recuperate his investment with a profit. These may be public listing or a third-party acquisition that will buyout the investment. This will mean that the company looking towards venture capital as a mean to finance its future development needs to acknowledge the fact that a certain part of the company is likely to be in foreign hands, unless the company finds the necessary resources to buyout on its own (with interest) the what the venture capitalist owns.

In order to fully evaluate the potential of a venture capital form of financing, we need keep in mind the two temporal perspectives, long-term and short/medium-term. In the short run, the venture capitalist will be investing in the company and, further more and even more important, he will be involved in the short-term evolution of the company, spending effort in order to achieve positive short-term performances. They will be analyzing the market potential and the possible trends of the company's sales during the time his capital will be involved in the development of the company. This can only have a positive impact on the development of the company.