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.

The eifference between debt and equity financing

Companies use debt and equity financing to leverage capital expenditures, project development and operational expansion. Without leveraging company's financial growth is limited to retained earnings. For this reason debt and equity financing are often times considered vital to business expansion. Both debt and equity financing have advantages and disadvantages associated with them. This article will illustrate both forms of financing then come to a reasoned conclusion as to when and why each form of financing can be valuable.

Debt sources of financing

Debt financing includes collateralized bonds, debentures, business loans from banks, and lines of credit. Generally debt financing comes with an interest rate somewhere between 3-8% depending on the type. For this reason debt financing can be less expensive than equity finance depending on the expectations of the equity financiers. Debt financing may not always generate enough capital to perform intended business projects and goals as this type of financing tends to be more conservative in its lending requirements.

Equity sources of financing

When using equity as a source of financing a company is seeking capital from investors through the issuance of shares. These shares can be common or preferred i.e. having voting rights or priority in the case of company liquidation. Equity financing can also take the form of employee stock options which replace direct pay in the form of a corporate benefit. In the case of common and preferred shares, equity financing can be variable based on stockholder expectations and type meaning the higher the expectations, the higher the cost of financing.

Advantages and disadvantages of debt and equity financing

In business, both debt and equity financing have their advantages. Debt financing from financial institutions is subject to formal approval from lenders and monitored by organizations that rank the quality and credibility of corporate bonds. For this reason, debt financing can not only be a source of cheaper leveraging, but also an indicator of how viable a projects and goals actually are in terms of how convinced lenders and analysts are about the quality of the debt.

On the other hand, in a competitive market place, venture capital and equity financing can mean the difference between innovation, market share and a competitive edge. Often, such ventures can have more risk and therefore demand more return on investment making the financing more expensive. Nevertheless, if a business can garner a return on capital greater than the cost of goods and services including equity costs, then those projects become profitable.

Depending on the type of business, competitive ventures requiring excessive equity financing may simply be unnecessary, impractical or not in accordance with the goals of the business owners. In other words, not all businesses are designed to rapidly expand and yield growing profits on an annual basis. Businesses that simply intend on yielding a steady profit on an annual basis may benefit more from debt financing because of its structured and cost effective nature.

In the case of Equity financing, businesses that lack credibility, start ups and rapidly expanding businesses however may make positive use out of equity financing not only because it may be the only source of capital around but because it can provide the leverage necessary to accomplish the corporate vision.

Summary

Financing is a form of leverage not uncommon to most businesses in one form or another. Smaller businesses tend to use less, fixed or no equity financing due to corporate goals, cost of financing and business size. Contrarily, large high-powered industry leaders and high growth firms may find it essential to raise capital through equity financing to accomplish annual forecasts, corporate goals and owner objectives. Each form of financing has its advantages and disadvantages as this article has illustrated, but in the end financial leveraging is something that may be required for business survival and profitability regardless of cost.