Introduction to venture capital
There’s so much potential for your business to grow. You know it, your books show it. But if your business is going to realise that potential, you need investment.
You’re past the stage of angel investment, which means your idea has progressed past a concept into a fully-fledged enterprise.
You’re further along the business pipeline and you have traction. Now you need to raise more capital.
Venture capital – an investment in the early stage of your business or company – could be an option.
Jamie Davison, co-founder of Carbon group and start-up investor, says people usually start looking at venture capital after they’ve exhausted all the money they can get from family and friends.
Also, they can’t get the money from the banks, because banks are more conservative and need a track record.
Venture capital organisations are often made up of institutional investors, or family offices of high net worth individuals. Venture capitalists are trying to get a bigger return than if they used traditional investments like the stock market, bonds or property.
They also want to help the venture succeed by imparting their wisdom, knowledge and advice.
Venture capitalists will take more risk than banks.
“From a venture capitalist point of view, it’s a high risk, high reward type thing. If a venture capital invested in 10 enterprises, you wouldn’t expect all 10 of them to be a success,” Davison says.
Companies they invest in might not necessarily have a track record, but they do have a lot of “blue sky” (in the financial world that means tremendous upside potential).
Venture capital organisations are more prevalent on Australia’s east coast than the west coast.
When a venture capitalist invests in your company, they’re saying they believe in the team running your enterprise.
It’s always important to have what’s called a “warm introduction” between you and the venture capital company. This can be done using an entrepreneur or executive you both know and trust.
Davison also warns it’s important to watch your outgoings when going down the venture capital path. He says surviving this pathway can be disheartening and expensive if you’re not fully aware of what is going on.
For example, some consultants might try and prepare a small business for venture capital. But they will charge expensive retainers and not actually produce any results. This can be disheartening and also drain your business of further cash.
He says there’s no risk for the consultant because they are getting paid no matter what the result of the capital raising is: “If it was fully based upon performance, the outcome for the client would often be completely different,” he adds.
Let’s have a look at how venture capital helped one firm.
Case study - Online booking business success
A business with a new idea for an online booking application started off with five people. After obtaining money from some venture capital firms, it has now grown to around 200 people.
The company has expanded to the eastern states and is looking to emerging markets overseas.
The success could be attributed to the knowhow behind them, which has given them that confidence. Apart from the cash injection, it was the knowhow they gained from the venture capital organisation that helped to propel them.
The owners/developers approached the venture capital organisation with a Minimum Viable Product (MVP) and they were generating some sales, but it was definitely pre-profit.
As with any organisation, they could only run at a loss for so long. They were never going to get money for their idea from the banks and were too small to be listed on the ASX, so venture capital was the only way for them to continue.