According to the latest PricewaterhouseCoopers/National Venture Capital Association MoneyTree report, venture capital (VC) investments in the first half of 2009 are 55% lower than the same period in 2008, falling from $15.2 billion to $6.8 billion. To be sure, $6.8 billion is still a substantial sum of money, but the decrease in funding from venture capital firms means increased competition for every dollar in an financial environment that is already unfriendly to new investments. As banks have reduced or eliminated companies’ credit lines and are unwilling to provide other forms of financing, entrepreneurs are now forced to look for more-creative ways to fund their operations. Venture capital funding, where investors provide financing to begin operations, support ongoing growth, and foster development of new ideas, is an increasingly appealing option for small businesses impacted by the recession. Whereas entrepreneurs may have previously resisted relinquishing any amount of control over their companies (see below) in exchange for operating capital, some organizations now find that they have no other choice if they are to survive.
To help entrepreneurs navigate the difficulties of venture capital funding negotiations, three VC investors provided essential tips for securing financing in this month’s issue of Entrepreneur’s StartUps magazine. As the investors set out in their article, venture capital investments are expensive for the receiving entity, and given the current economic state, many VC investors are looking for companies with practical, problem-solving products and experienced management, among other things. For the complete list of tips from Alex Ferrara of Bessemer Venture Partners, Maneesh Sagar of CT Innovations, and Jon Elton of iNovia Capital, see “7 Tips to Score VC Cash,” appearing in October’s issue of Entrepreneur’s StartUps magazine.
How Venture Capital Funding Works (Briefly)
Unlike bank financing, which typically requires monthly payments towards the amount loaned (principal), venture capital funding is provided with the understanding that, because the entity receiving the funds is growing (be it a startup or an established company developing a new product), repayment of the VC investment may not occur for many years. In exchange for the increased risk that the venture capital firm may never see its investment repaid, companies receiving funding typically transfer ownership of a portion of the company to the VC investor. VC firms also often establish aggressive timelines for growth or development, making further funding contingent on meeting these goals. Some VC firms may also provide management or other expertise to entities they funds, ensuring not only that the investors has some control over how the company is run, but also allowing the company to receive knowledge or personnel it could not otherwise afford. While entrepreneurs are forced to give up some control over the organizations they have founded, the alternative of running short of operating capital would be far more detrimental to the their success.