For any small business thinking of funding their new adventure, one possibility is to approach venture capitalists (VCs) and raise the funds. Many VCs invest in small companies, and if you watch even one episode of Shark Tank, you know it is based on having a sound idea.
However, you might wonder how VCs acquire their own funding and raise capital. It's important to know because, as a business owner, it's always wise to understand the entire funding process from the very start.
Business News Daily spoke with several VCs and other experts to find out more about financing before you even sit down to discuss your business idea. Here are the top ways VCs provide funding so they can help you realize your business dreams.
Investing is a complex process, and it's not critical to understand every aspect of where the funds originate or every fine detail. However, as Shruti Gandhi, founder and managing partner from Array VC, explained, it helps to learn the term institutional investors. These are large investment organizations like university endowments that pool member contributions. A VC acts like a gatekeeper, or point of contact, for these organizations that might not approach a small business directly.
Of course, one of the most common sources of VC money is from the actual VC – someone like Bill Gates who has already amassed a fortune. Matt Cohen, founder and managing partner for Ripple Ventures, says a VC might invest up to 15 percent of their personal funds, which are matched up with another lead investor. "It all starts with the network you are trying to target," he said. "Most LPs invest alongside friends, business colleagues and fellow co-investors."
A network of funds
If a VC doesn't have a nest egg of their own, and they have not approached an institutional investor, another approach might be to pool a group of investors on their own. In fact, this is the most common tactic. "Usually VCs will invest other people's money," says David Altemir, president and senior consultant for Altemir Consulting. "It's not uncommon for graduate MBA students to pull together a network of investors (sometimes involving family trusts) or join an existing VC firm to invest other people's money in new ventures."
Gandhi says another common source of investment money is from individuals with a high-net-worth – think "rich uncle" or a friend who has a family fortune. This is common when the VC company itself is not holding a fortune but has connections to one particular person who has the funds available for investments.
It's worth noting that VCs are highly connected, and not just with wealthy individuals. Many have been working in the business world for so long they have connections in multiple markets, and they're born networkers.<p>
Cohen mentioned friends as one possible investment source for venture capital firms. As a small business, you might be seeking funds from one VC who meets with you, but that person might represent dozens of friends and colleagues who are ready to help lift your company to new heights.