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Startup Venture Capital 101

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					Startup Venture Capital 101

Startup capital is the capital that an entrepreneur needs to pay the
necessary items needed when starting a business, like business space,
equipment, supplies, and employee’s paychecks. Meanwhile, venture
capital is the fund that a venture capital (VC) firm or an angel investor
would provide to a starting or trouble-laden business.

Unlike loans, venture capital is invested in the business rather than
being returned. With bank loans, for example, the money borrowed should
be returned within a specific period of time along with interests and
other fees. But with venture capital, the money is provided in exchange
of equity in the business. The venture capital firm would take part in
the business, they could have one of their own to be a member of the
board of directors.

Aside from having a portion of the company, the VC would also have the
right in knowing the operation of the business. Their opinions would
matter especially when making decisions in the company. VCs rarely
concern themselves with the daily operation of the business unless the
life of the company or business is being threatened. Aside from this, the
VCs’ opinion would also matter and they could prohibit the portfolio
company to close down.

The difference between a venture capital firm and an angel investor is
simple. An angel investor does not operate like a firm and more of a
wealthy individual who invests in startup businesses. An angel investor
usually does the transaction informally and privately. An VC firm could
be a group of wealthy investors or an affiliate of a bank or an insurance
company.

Another difference between an angel investor and a VC is the amount that
they could give to the starting entrepreneur. VCs would normally provide
funding not less than $250,000. Angel investors on the other hand could
give a smaller amount than VCs but still in exchange of equity.

Not all venture capital firms invest on startup businesses. There are
different types of capital which depends on the different stages of the
business. For example, the seed capital would be mainly for research or
planning stage. Startup capital would be for the procurement of initial
needs. The mezzanine capital would be fore expansion and there are also
later-stage capital or funding which would be for transitional stages in
the company. So before you bring you business plan to a venture capital
firm, make sure that they are indeed for startup businesses.

VCs do not just invest on the next business venture. Currently, because
of economic crisis affecting us, venture capital firms would rarely
invest in other business but rather concentrate on their existing
portfolio companies and make sure that they are running well.

But even if we are not in an economic recession, VCs are still very
selective with their investments. They would have to consider the nature
of the field where your business will be a part of, geographic or
location preferences, the product or the service’s marketability, strong
management and competition. Aside from that VCs are known to accept
those businesses that would enable them to profit big time within 3 to 10
years, other within 5 to 7 years.

Application for a startup capital would require the entrepreneur to
submit a comprehensive and complete business plan. Some VCs would even
require the list and credentials of the management team and financial
projections. The entrepreneur just needs to clarify with the VCs about
the additional requirements.

To exit out of a business, the VCs would sell their share of the company
through an initial public offering or IPO to the company.   The company
or the business could buy the stocks within the next 7 years. They could
also exit through a merger with another company, where the VCs would
receive payment for their stocks. VCs could also exchange the equity for
money and the management teams gets incentives from the equity.

We would need to understand capital venture firms and their startup
capital investment. In this way, simple, starting and young entrepreneurs
could start their business an know their options. If you have decided
that VCs are the right place to go for your business venture, then go
ahead and present your plan. It could be start of your success