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What is Venture Capital?
Venture capital (VC) is equity financing for fast-growing small and medium sized companies which do not normally have access to public funds.

How Does Venture Capital Work?
Venture Capital funds are raised from financial institutions, commercial organizations and individual investors. They are invested in projects which provide above average returns.

To achieve these returns, venture capitalists involve themselves in many aspects of their investee companies. They often provide advice and assistance in formulating product and marketing strategies, establishing business alliances, and in managing human resources. These "value-added inputs" by the venture capitalist will help accelerate and manage the growth of the investee companies.

What Do Venture Capitalist Look For?
Traditionally, venture capitalist focus on early-stage financing of promising start-ups. Over time, this has expanded to cover expansion-stage financing of small and medium-sized businesses as well as management buyouts.

Venture capitalists look for companies with a superior product or service targeted at fast growing or untapped markets. Venture capitalists must also be sure of the management's ability to turn innovative ideas into commercial successes. Lastly, they look for clear divestment routes such as the potential for public listing or a third party acquisition of the investee company.

How Can Venture Capital Benefit the Entrepreneur?
A venture capitalist brings with him the expertise, resources and business linkages that will contribute to the growth of the investee company. The areas which he can contribute are:

·         Financial Management
Financial control and planning, cash management, debt management, capital restructuring, fund raising and initial public offering.

·         Corporate Planning
Formulation of corporate and marketing strategies; act as a "sounding board" for business ideas.

·         Business Linkages
Opportunities to establish new business linkages through the venture capitalist's business networks as well as access to more business opportunities.

·         Human Resource Management
Recruitment of key personnel and formulation of human resource policies.

·         Corporate Image
Endorsement of the potential and capabilities of the investee company, thus enhancing its corporate image and value.

Preparing a Business Plan
To provide the information needed by potential venture capital investors, the entrepreneur needs to prepare a business plan. Briefly, the plan should contain the following information on:

·         Management
Background, track record and experience.

·         Industry
Current state and future trends, competition and factors peculiar to it.

·         Marketing
Target markets, sales objectives, marketing strategies and budgets.

·         Financial Projections
Cashflows, capital investment and working capital requirements, and debt-equity structure.

Other Issues For Consideration

·         Control
If the entrepreneur wants venture capital funding, he must offer equity in exchange for the venture capitalist's investment. In doing so, he must also be willing to share a certain degree of control of the company with the new venture "partners". They would want to have enough influence to guide the company and to safeguard their investments. They would however not be involved in the day-to-day running of the business.

·         Valuation
Venture capitalists often use a combination of both qualitative and quantitative methods. These include comparisons with other companies, multiples of sales or earnings, net asset values and discounted cashflows.

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