Work with venture capital companies? Advantages and tips

If you have a business, it is likely that at some point you need an injection of capital. There are different sources of financing, one of the most interesting is venture capital. Through this financial instrument a venture capital company will put at your disposal the economic resources you need by becoming a partner or shareholder, so that it shares with you the business project and the risks involved.

What are venture capital companies?

Venture capital companies are usually public limited companies whose main corporate purpose is to participate temporarily in the capital of non-financial companies that are not listed on the stock market. These companies offer different financing methods, including loans, in addition to offering financial advice.

According to the companies to invest, venture capital is divided into:

Capital Venture

  • Investment in businesses that are in their initial phases with the objective of financing their consolidation. Generally it is about investments of 3 to 7 years in technological startups with a great potential for growth.

Private Equity

  • Investment in already consolidated businesses aimed at financing its expansion and internationalization process. It usually focuses on companies that have demonstrated the viability of their business model and have a great capacity to generate cash flow.

Advantages of working with venture capital companies

Access to a source of alternative financing to banks

Access to traditional financing through banks is still complicated, especially for SMEs and startups. The companies recognize that the price of financing and the lack of guarantees requested are the main obstacles to accessing bank loans, according to the 7th Cesgar Report.

With the venture capital companies you get an injection of capital in exchange for a share in the company, so the profitability and reimbursement will depend on the business success of the project, you will not be tied to a certain interest rate nor will you have to repay the loan regardless of the evolution of the business, as in the case of bank loans. In addition, no guarantees are required because the guarantee is the business project itself and the management team.

Boosts business growth

Venture capital companies look for profitable investments, which means they want scalable projects that facilitate exponential growth of profits. In some cases, if they acquire enough shares to have control of the business, they can appoint a management team that is responsible for managing the company to multiply their growth speed.

In other cases, even if the venture capital company does not take control of the business, it can contribute to its growth by providing its experience, relationships and specialized advice. In addition, the participation of these companies improves the reputation of the business, projecting a more solid and professional image towards customers, suppliers and other investors.

Optimizes the treasury and the income statement

Venture capital companies usually make considerable investments. In 2017, 16.8% of the companies received between half a million and one million euros and 17.9% between one and five million euros, according to the latest study on Informal Risk Capital in Spain. In the case of public risk capital, these figures are lower, but still provide financial stability to the company that allows it to successfully and calmly face its expansion process.

How to find the risk capital you need to grow your business?

Choose venture capital companies that have successfully invested in businesses in your sector. It will be easier to negotiate with them since they “speak your own language”. In the Spanish Association of Venture Capital Organizations (ASCRI) you can find the list of associated entities operating in Spain.

Prepare a detailed and professional business plan in which present an analysis of the competition and your forecast of growth for the coming years. You must highlight your unique value proposal and the professionalism and experience of the project management team.

Decide what role you will have in your business. Venture capital companies usually stay a few years in the business, so their focus on profitable investments can contradict the values ​​and vision of the business. Consider that these companies usually require presence in the board of directors and in making strategic decisions, so you need to be clear in advance how much control you are willing to give up.

Prepare a good exit plan. The exit of the venture capital company can generate conflicts due to the difference of criteria when valuing the shares. Anticipate that problem by designing an attractive exit plan for the fund and convenient for your business.

Form yourself in Finance. A venture capital company can quickly boost your business, but it could also cause you to lose control of it. To avoid this risk and to be able to choose the most convenient source of financing, it is better that you study a Master of Finance for Entrepreneurs.

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