Venture capital sources are easier to identify than angels, but harder to close. Many firms and individuals call themselves venture capitalists, but they are in fact brokers who present deals to individuals or companies who invest. True venture capitalists are individuals who manage a fund that invests in particular types of businesses.
Typically, a venture fund will raise money from high net worth investors, usually in the form of a private equity fund, and then invest that fund in promising businesses. The fund has its own money, and in order to receive funding, you and your company must go through an extensive due diligence process. If you pass muster, the fund will offer you a term sheet, which can be negotiated up to a point, and then you will proceed to the signing of a stock purchase agreement in order to complete funding. Venture capital
Firms tend to specialize in industry sectors and some may only fund companies beyond the start-up stage.
Venture capital money is expensive and relatively hard to get. A venture fund expects a return, of five to ten times its invested money. It needs this type of return, because 70%-90% of the businesses it funds will fail or only be marginally successful. The advantage of dealing with venture capital is that is tends to attach other venture capital and provide funds for subsequent stages of growth. It also can provide interim management talent and quickly ramp up a company for the public offering—if the market is available.
A listing of venture capital funds is available in Pratt’s Guide to Venture Capital Sources, Thompson Financial Services at 800-455-5844, or the Dictionary of Venture Capital, by Catherine Lister and John Harnish, John Wiley & Sons, 1996. Your company will have a distinct advantage in obtaining venture funds if you have a contact with the fund you are approaching. Always check to see what kind of companies the venture fund invests in before you submit your business plan.
Investor Funding Range: The funding
Ranges for various categories of investors look something like this:
Business Angels $200-$500,000
Venture Capitalists $500,000-$2M
Private Equity Fund Managers $5M+ IPO/Investment Bankers $20M+