Where is your business going? #4 Raising finance: venture capital or private equity

The Minister for Industry, Tourism and Resources the Hon Ian Macfarlane MP has announced a thorough review into the venture capital (VC) industry in Australia.

Recent takeover activity means that shareholders are looking for new investments.

But how do you match up business owners looking for finance with potential investors?

And why would a company seek investors rather than commercial finance?

There are several types of business financing options available to growing companies.

Assuming the business has got past the startup stage when the founder used up his or her cash reserves (and credit card limits) and the business cash flow is not sufficient to fund further development or expansion then the first option is a commercial loan. But paying off debt can drain a business with limited cash flow. New companies may not even have access to bank loans if they have no operating history and no security for the loan. Mortgaging your home is a serious step you need to carefully consider.

Angel investors are a prime source of early-stage financing. They are usually individual investors often willing to invest where there is too much risk for banks and not enough profit potential for venture capitalists. Angels will invest for a longer time than other investors  --  up to three years or more. They may also invest smaller amounts  --$1 million or less.

Venture capitalists, by contrast, represent managed funds which have stringent investment criteria and generally invest in high-growth companies. Because they need to realise a profit in three to five years, venture capitalists will not consider very new businesses and invest in larger amounts.

Venture capitalists often take an active role on the company's board. Founders will need to accept a potential loss of control in return for the skills that the investors bring to the board table. But both parties must be comfortable with the terms of their agreement and their respective personalities.

According to Paul Allen in the USA:

• Angels fund 30-40 times more companies than VCs, but they do much smaller deals.
• VCs fund 1-3% of the deals they look at
• Angels fund 22% of the deals they seriously consider
• Angels fund 84% of rounds under $250,000
• #1 source of initial funding for startups is entrepreneur's own savings (74%)
• 10-15% of entrepreneurs who pitch at non-profit capital forums raise money
• 40% of entrepreneurs who pitch at venture forum meetings get funding
• Top two criteria for angels to invest in an entrepreneur are 1) enthusiasm of the entrepreneur and 2) trustworthiness of the entrepreneur.
• 94% of angels consider location to be very important in their decision   
• 80% would have made more investments over the past 3 years if they had seen more good plans.

Further Reading

Raising money by a startup

Top Ten List on Pitching VC's

Technology Ventures: From Idea to Enterprise this website includes case studies, short video clips, articles, and PowerPoint slides all focused on the creation and management of technology ventures. This site will continue to evolve with new media and features.

Management Buy out case study

Frank Demmler's site

Venture Capital in Australia

Comments

[anon]

Seriously, it's ironic to see a post on the Aussie VC industry because- we don't have one ;(

For starters, I can't find one (!!!!!!) Australian VC who keeps a blog. Absolutely, bloody hopeless. Even Chris Golis apparently doesn't have a clue.

And yeah...whatever the miserly statistics there are (what's there..like $15 billion under management)I tell you, there isn't even a hint of open dialogue between Australian VC's and entrepreneurs. Not a good thing.

Anybody in the States is fortunate enough to access like 100 (!!!) VC's who regularly post, explore and comment on the industry...and unless you've been living under a rock you'd know that the VC business is extremely competitive and awash with capital overhang. How good's that for founders?

And what do we have in Sydney? Like one or two substandard incubators (excluding ATP), some bullshit angel matching websites, and 10 or so early stage VC's who are either completely anonymous or complete shitheads.

Tell that to the Minister! Instead of trying to bloody solicit more capital from overseas (which is absolutely not needed- we have the highest amount of investable funds in the whole of South East Asia), the investment community needs a wake up call to loose the bullshit clout of anonymity and at least appear in some other publications that Private Equity Media, which no member of the public is even aware of.

Clever country my ass.

[Credit Card Application]

companies may not even have access to bank loans if they have no operating history and no security for the loan. Mortgaging your home is a serious step you need to carefully consider.

[medical billing]

they need to realise a profit in three to five years, venture capitalists will not consider very new businesses and invest in larger amounts.

[Erna27Lester]

The loans are essential for people, which want to start their company. As a fact, this is not very hard to get a sba loan.

[business loans]

Have no a lot of cash to buy some real estate? Worry not, just because it's real to receive the business loans to work out all the problems. Therefore get a student loan to buy all you require.