Are you a budding entrepreneur looking for ways to finance your startup and lift it off the ground? For that you need to find either organizations or individuals who are willing to trust in your idea and invest in your business.
Why would they invest in your business in the first place? In return for a stake (or equity) in your business- to get their investment multiplied and returned to them when the business grows and reaps profits. This is why organizations who fund startups specifically look for a lot of growth and return potential in a business that they would like to fund.
The problem with traditional commercial bank loans is that these lenders are not willing to take on risky investments. Maybe you did apply for a bank loan but were rejected because your startup idea was a “bad risk”.
This is where a venture firm comes in.
Venture capital and venture firms
Ever heard of a business being “venture capital backed”?
Venture capital (VC) is as it sounds- the capital or investment provided by an outside investor that is needed to start a business venture.
A venture firm (or a venture capital firm) is a company that gets you that capital. The good news is that venture capital firms are willing to invest in riskier businesses than banks would. What they look for is a sleek business plan and your determination to succeed!
But where do VC firms get the money from?
You turn to a venture firm for your financial needs, but where does a venture firm get that capital from? Are the people running the firm all millionaires and billionaires themselves?
Well, not exactly. Although most venture firms are run by experienced entrepreneurs and business men, they are the “General Partners (GPs)” who are responsible for managing and running the firm’s operations, but are not the main monetary contributors.
The second part of a VC firm are its “Limited Partners (LPs)”, and they are the ones investing the real money in a VC fund.
Look at it this way: a venture firm is a partnership between GPs and LPs, where generally, GPs are the brain and LPs are the brawn.
There are two main categories within LPs too:
- Institutional: These are groups, companies or organizations.
- Individual: These are individuals with a high net worth who invest their money into the fund, and this can include many of the GPs themselves.
Once a business starts profiting, within a period of about 3-7 years, they return the investment with interest to the venture capital firm, which then returns it to the investors or LPs.
How does the venture firm earn?
As we just said, the LPs get their investment back with a lot of profit, but what do the GPs actually running the venture firm get?
Well, they keep a share of those profits as fees before returning it to the investors. This is called carried interest. The rule is usually 80-20, meaning that the investors get 80% of the profit, while the firm gets 20%.
The firm management also gets a management fee or salary from the VC fund.
Do venture firms offer only financial capital?
No, they often provide much more than that, and why not? It’s also in the interest of the venture capitalists for the businesses they invest in to be successful.
Since these firms are run by successful entrepreneurs and businessmen themselves, they bring with them a ton of experience, expertise, and links! A lot of VC firms also pair startups with experienced entrepreneurs (can be from the LPs too) to provide them with industrial knowledge, guidance, contacts, and other resources to kick-start their business effectively.
So if you did not get approved for a bank loan, don’t worry. Venture firms have got your back! They offer you not just financial capital, but a lot of industrial expertise to start your business too. They are there to assist you at every step and give your business the spark it needs to succeed.