Raising Money for Your Business 6

How much money do venture capitalists usually invest?

There's no set amount; however, most are looking to invest at least half a million dollars since companies requiring less than that amount are likely not to have the potential to become large enough and profitable enough to make the investment pay off.

Will venture capitalists give me cash to start a business?

Although some venture capital firms do provide seed money (start-up funds) for some businesses, most of the time venture capital isn't invested until there is an available track record indicating the business is successful and has potential for growth. However, you might find start-up funds from one or more local "angels" (small investors, also known as informal venture capitalists). It is usually through these private investors that new businesses raise enough money to get a business going or to do initial development work.

Where do I find these "angels"?

The angels often come from your personal contacts—friends, family, professional references. Some people also advertise for investors in the business opportunity section of newspapers. If you plan to advertise for investors, it would be advisable to consult your attorney first to avoid running afoul of laws governing the advertising of investment opportunities in your state, (These laws are often called blue-sky laws.) One way some entrepreneurs try to avoid hassle over investment advertising laws is to advertise for a partner and include phrases in the ad such as "substantial equity position for the right partner."

Where do I find venture capitalists?

You can locate investors through industry trade associations, attorneys, accountants, colleges and universities that teach business, Service Corps of Retired Executives (SCORE) offices, Small Business Development Centers (SBDCs), or SBA offices. In addition, there are directories of venture capital firms that describe the specialty of each firm, the size of the investments the firm usually makes, and other pertinent information. Such directories are available at large public libraries. You can also find investors on the web through ACE-Net and other web sites.

Does it matter which venture capital firm I contact?

Yes. Venture capital firms usually specialize in particular industries. If you are looking for money for a bio-tech company, it is a waste of time and postage to send your business plan to venture capitalists that specialize in entertainment.

What should I do to contact these firms? Do I call? Go to their offices?

The best way to contact venture capital firms is to get a reference to the firm or investor through your banker, a venture capital club, or some other source. If you can't find anyone to make a reference and don't meet anyone through your own networking, call firms listed in directories and ask to speak to whoever handles your type of business. If interest is expressed, find out whether the contact prefers to see the plan first or would be open to having you present the plan in a personal interview.

How else can I find investors?

There are also people who "rep" a plan (find investors for you through contacts they have). Expect to pay a fee to such representatives (as much as 5 percent of the money raised), but this fee should come out of the money raised; you shouldn't have to pay any up-front fees except perhaps for travel, mailings, and similar out-of-pocket expenses your representative may incur. These people are often called financial consultants. You may be able to find them through business brokers or through private networking.

What will investors expect in return for money they invest?

Investors will expect some degree of ownership and a way to get their money out of the business after a set period of time. The amount of ownership you would have to give up will vary with what you are bringing into the business in the way of experience, money, value of the business at the time of financing, and so on. If you have a great idea but no management team, the venture firm might want to hand-pick people to run the company. The investors will generally plan on getting their money back by selling their shares of the business to others through public or private stock offerings.

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