Are You a Venture Capital Candidate?
Venture capital firms are in the business of making high-risk investments, which usually includes taking an equity position in the company. They may also require voting control before they will finance a company which will significantly affect the business owner's goals. Venture firms will invest in subordinated debt, but generally only if it is convertible to equity. They typically require a 35-50% compound rate of return with a provision that will allow them to liquidate their position in 5-7 years. This provision may be a "put" requiring the company to buy them out, or an agreement to register the stock, which causes the conversion of debt to marketable equity securities (the company would retain a right of first refusal).

The amount of investment and percentage of ownership in the company that a Venture Fund will require can be computed. The computation is based on the perceived future value of the company and the rate of return the Venture Fund requires on their investment in order for interest them in taking the risk.

What are the Stages of Venture Financing?
Seed Stage Capital is the funding for developing an idea for a product or service. During this stage feasibility studies are conducted and the business plan is formulated. Most of this financing is provided by the entrepreneur.

Start-up Stage Capital is utilized to get the company going prior to actually marketing the product. Tasks include product development, completing final market studies and assembling the management staff.

First Stage Capital is provided to launch production and sales of the product or service.

Second Stage Capital is for supporting operation of the company which may not have even produced a profit yet. Assets draining the capital of the company include accounts receivable and inventory required to support growing sales.

Third Stage Capital will be used to expand the business' marketing effort, production and working capital into a large scale operation.

Fourth Stage Capital (also referred to as bridge financing) is an interim relief while the company seeks a public stock offering.

Choosing a Venture Capitalist
The focus of your search should be one of creating a long-term beneficial relationship. With this in mind, a preference should be given to firms with a local location, a fit in the amount of capital they are comfortable investing, and a fit in the stage of development and the industry that they have experience funding.

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