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	Tom Severance Author of Business Start-Up Guide
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	Steven D. Strauss Author of The Small Business Bible
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	Stephanie Chandler Author of The Business Startup Checklist & Planning Guide
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	Joe Kennedy Author of The Small Business Owner's Manual
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Venture Capital

Here is the lowdown on venture capital: It seems glamorous, but it’s not easy, cheap, or pleasant. With that positive introduction out of the way, let’s see exactly what venture capital is.

Venture capitalists are institutional risk takers and may be groups of wealthy individuals, government-assisted sources, or major financial institutions. Most specialize in one or a few closely related industries, so it’s important to target the right ones.

Venture capitalists are active equity investors in small businesses. Their capital is invested in very specific types of investment opportunities for shares of stock--meaning partial ownership--and not as a loan. Capital invested in a business certainly improves the chances of additional debt financing because equity increases and the assets of the company are not offered directly as collateral. Still, giving up ownership and control often is not easy. Unlike conventional equity investors, venture capitalists seek to be actively involved in the management of their various investments. These firms have special expertise in many areas and will normally require one or more seats on the board of directors.

VC financiers are looking for small businesses with explosive growth potential and the ability to generate compounded investment returns of 25 percent to 40 percent. This usually requires a compelling new product or service in a bleeding-edge type of business area, including many high-technology business niches. To get such financing, you must first write a very formal, M.B.A.-style business plan, requiring immense amounts of time and effort, and present this numerous times to some very serious people.

Even with this, less than 1 percent of venture capital candidates ever get the funding they desire. For those that do, about 80 percent fail to deliver the required returns. In that case, most VC agreements allow the investors to fire the small business owner and take control of the company. This happens in the majority of cases. The converse is not true: If the small business wants out of the deal with the VC investor, it normally can’t be done without buying back the VC’s stock shares for a huge return. If your small business needs funding this badly, the Mafia may be a more appealing source of funds.