Financing Your Start Up with Venture Capital

Venture capital refers to investments made into start-up or emerging companies with high potential for growth and return.  Venture capitalists not only provide money, but also business planning expertise and assistance to help start-ups succeed in its industry.

Venture capitalists are interested in businesses that have high growth potential to quickly produce large profit margins. Venture capitalists tend to focus on start-ups in technology, health care, manufacturing and consumer products, since these industries have the highest growth potential. 

If you plan on being the next Apple, Google, or Genentech, venture capital is a viable financing option.  However, if you are the neighborhood bakery or beauty supply shop, you may be wasting your time with venture and equity capitalists.  You will have greater success obtaining start up financing through traditional loan programs.

Types of Venture Capital

The term “venture capital” is often used in conversation to mean money invested by a third pary in high-growth start-ups.  However, there are several types of investors with slightly different approaches.

Small Business Investment Companies

In 1958 Congress created the Small Business Investment Company (SBIC) program to help entrepreneurs get capital needed to launch their businesses.  SBICs are privately owned investment firms licensed by the Small Business Administration.  These firms combine their own capital with funds borrowed from the Federal government at low rates, and in turn, invest these funds in promising new ventures.

SBICs benefit small business owners by opening up greater access to equity capital and expert assistance they may not otherwise get through traditional venture capitalists. The following resources provide more information on SBICs:

•   List of Licensed Small Business Investment Companies
•   Guide to Seeking Financing from SBICs

Private Venture Capital

Venture capitalists raise money from institutional and pension fund investors, such as foundations, endowment funds, retirement funds, and corporations.  A venture capital firm operates much like a mutual fund by pooling these funds and looking for investments with high returns. 

Typically, venture capital investments are made in companies that are already in business, but have the highest potential of growing quickly and emerging has profitable market leaders.  Private venture capital is often harder to obtain than other forms of start up capital because these investors require some form of collateral before lending money. 

Equity Capital

Equity capital is represented by funds raised in exchange for shares of ownership in the company.  Unlike venture capital, equity financing allows a business to obtain funds without incurring debt, or without having to repay a specific amount of money at a particular time. Equity capital may come from many different sources: private equity firms, angel investors, or rich uncles.

Angel Investors

Business “angels” are individual investors who provide financing to start-ups in exchange for shares in the company.  Typical business angels are successful entrepreneurs or retired executives of successful start-ups.  Unlike venture capitalists who manage money contributed by others, angel investors typically invest their own funds, and provide expert advice and oversight.

Angel investors have an advantage over venture capital firms since they are not attached to as many rules and regulations as the larger firms.  They can allow start-up founders to cash out partially by selling some of their stock directly to the investors.

The Angel Capital Association of America provides a directory of angel investor groups to help you find angels who might be interested in investing in your venture.

Active Capital is a nationwide listing service that connects entrepreneurs with angel investors. Potential investors can obtain information on start-ups and expanding small businesses seeking $250,000 to $5,000,000 in venture capital. Active Capital's main benefit is that it allows entrepreneurs to directly access a nationwide network of investors while complying with federal and state securities regulations.

More Information

Visit the Guide to Venture Capital for more information on these programs and more information on how to obtain venture and equity capital for your start-up.

Visit the Open Directory Project’s Venture Capital Directory for a listing of private venture capital and equity firms in the U.S. and around the world.