Things to consider when investing venture capital

Becoming a venture capitalist requires lots of money, as start-up companies look to this source of financing as an alternative to business loans and other forms of debt. So naturally the first step is to acquire access to a large amount of funding either via personal wealth, financial leveraging, or business collaboration.

Venture capitalists combine investment capital with business knowledge to yield potentially soaring returns on their money. Anyone with financial know how can become a venture capitalist, but to be a successful venture capitalist involves a few important variables. This article will discuss those variables and also provide tips that can be useful to existing and future investors and venture capitalists alike.

• Raising Capital

For venture capitalists who are still not venture capitalists, but want to become venture capitalists takes financial savvy and business astuteness. One can either start out small turning over investments every few months with increasing profits or successfully influence a benefactor that one's venture capital choices will yield a better rate of return than any of that benefactor's current investments. Other sources of venture capital include savings from employment, capital gains from investments or loans from private sources.

• Business Valuation

Valuation of businesses is a key part of any venture capital investment. Venture capitalists must know how much a business is worth, especially if a majority ownership position is being taken in the company. To properly value a business involves forecasting, analysis of financial statements, understanding economic and market conditions such as supply and demand, regional variances in costs, logistics, asset management structure and so forth. Essentially each operation within the business should be assessed from bottom to top to arrive at a fair market and/or negotiable price per share in a business.

• Risk Assessment

Since many new businesses fail within the first 5 years of operation, a statistically verifiable risk exists with most if not all venture capital investments. Such risk involves competition, capitalization, managerial problems, overhead costs, marketing concerns and any unique factors specific to the type of business. For example, if the new business involves a recent technology, determining if all the bugs been worked out or if a high percentages of sales will return for warranty maintenance can have an impact on both business brand equity, labor costs and working capital management. Knowing and accurately predicting these things can help reduce the risk of a venture capital investment.

• Investment Strategy

Investment strategy comprises all the necessary steps utilized in achieving the long term objective of garnering an optimal return on one's investment. Investment icons such as Warren Buffett and George Soros and Richard Branson are all very skilled and knowledgeable business investors whose investment styles can be used as models for any venture capitalist seeking to model one's strategy on that of the professionals. Furthermore, investment strategy is the model by which investment success can be achieved. Such models may include factors such as entry strategy, exit strategy, negations terms, assessment of both ownership and managerial integrity among many other financial considerations.

• Tips for Becoming a Venture Capitalist

1. Know how to walk away. Some deals are just bad, not worth more time or money than is available and are doomed to fail. If one has already invested by the time such knowledge comes to bear, failing to not hesitate could cost more than one would like to lose.

2.  Develop a financial third-eye. All good investors have a business sense, a financial intuition and a know how to see an opportunity before the majority of other investors see the same opportunity. If one already has the business third eye, then develop it through knowledge, if one doesn't have it, learning to simulate it may help.

3.  Don't Panic and Persevere: If things don't always go according to plan, don't worry, even the best investors lose from time to time.

4. Dedicate: Over investing or speculating can cause one to lose site of one's investment goals. Keeping the eye on the ball and only investing in things one is completely sure about, confident in and knowledgeable about can make a difference.

5. Pay Attention: Missing important details and distractions can be all it takes to turn an investment sour. Since business is about profit, small oversights in profit margins, cost estimates and other forecasts can make the difference between a capital gain, a flat investment or capital loss.

Venture capitalism may sound fun and exciting but there is some skill to it. Simply throwing money around into businesses is one thing. Investing for maximum capital gain is another. Skilled venture capitalists like and know what details are important and maximize on them. The above information and tips illustrates some of the key variables used by and inherent to venture capitalists. Becoming a venture capitalist may take time especially if one is starting from the bottom, but it is achievable.