Venture capital – an attractive but difficult way to fund a business

18.9.2009

There are many ways to fund the growth of start-up businesses. According to Rana K. Gupta, venture capital is one of the most difficult business models. But venture capital offers a lot of significant advantages, which is why entrepreneurs are so keen to get it.

"Generally a venture capital investor (VC) provides competence, networks and a ready-made path to the market. Together, they allow for huge growth and success, and a quick way for the entrepreneur to get rich," says Gupta.

There is a ‘but,´ however. Venture investors are very selective about where they put their money. In the US, for example, there are more VC investors than anywhere else in the world but only a little over one per cent of the start-ups receive venture capital.

What does VC mean?
Rana K. Gupta is a Boston-based growth financing specialist, venture capital investor and professor. He is an expert on financing technology start-ups and business growth.

"It is critical that entrepreneurs understand the various financing methods to be able to pick the one that is right for them. The thing to know about venture capital is that it´s an investment, above all, with an expectation of profit within 5 to 10 years. A venture capital investor is out to make money," Gupta says.

This is why entrepreneurs must be ready to hand over some of their power to the investors in all aspects of their business, from strategy to personnel. They must also be willing to sell their company at some point.

How to get VC?

What kinds of companies attract venture capital investors? According to Gupta, those with products that generate a new kind of added value for customers; there must be immense market potential and a very short time-to-market. In practice, the value added brought by a novelty is either a way to save money or to make it.

"In addition to the product and its market potential, capital investors want to have a precise picture of the company's competence. They want to know the team that's on the job," Gupta says.

Teams can be changed, however, and promising products improved. Only the market is beyond control. Team and product competence and marketing are what investors can contribute to the success of a company, according to Gupta.

Normally, capital investors receive 20 to 60 per cent of a company's stock in compensation for the cash they put up.

"The risk is great for both the entrepreneur and the investor, but when everything falls into place, a company's result may explode from one to one hundred million in a matter of a couple of years," says Gupta.