Venture Capital Fund: How Does It Work?
Funding your business is one of the most important steps to start on the right foot. Aside from bootstrapping and applying for a loan, venture capital funding is another promising alternative. Keep on reading and learn how the latter works.
What is a Venture Capital?
Before you start approaching potential investors, it is crucial to know what a venture capital fund is. According to Investopedia, venture capital is “a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.” While it most commonly exists in the form of financial resources, it can also be in non-monetary forms, such as managerial expertise.
How to Get Funded
In understanding how venture capital works, another important thing to learn is how you can get funded. The first thing you need to do is to identify the venture funder you will approach. A quick online search will reveal a long list of possibilities. One of the most important is to find one compatible with your niche. Narrow down your options depending on your industry.
Once you have identified potential funders, the next thing to do is to create a compelling case of funding. You need to pitch your business, such as through an email. Often, you will need to provide a concrete business plan, which will show the funders how attractive your business is. Make sure to create a solid plan that will convince investors to funnel their money into your business.
After the initial presentation, the investors will review your pitch. They will be asking questions, and you must provide concrete answers. Some will ask for other requirements, which you have to submit accordingly. All the decision-makers on the part of the funder will meet and decide on your fate.
Once the venture funders agree to finance your business, you will receive a term sheet, which will identify the conditions of the agreement. This is a negotiation tool but not a final agreement. It will then be followed by a due diligence process, which can take several months to complete. If there are no red flags, you will receive the money in your bank account.
How Venture Funders Make Money
Venture funders are not charitable organizations. This means that they are not merely giving out money to businesses. They are like other businesses, and hence, they also have a profitability motive. This is why they have a thorough evaluation process to make sure that they will also earn from the businesses they are supporting.
One of the ways they earn money is through the carried interest of the funds that they provide to businesses. They will also receive a fee for the management of the fund capital. To monetize the funds, they are lending to businesses, they usually charge a management fee of 2%.
In sum, a venture capital fund is a great way to raise business capital. If you are a laundry business looking for venture capital, one option worth checking out is Clean Venture.