Nothing Ventured, Nothing Gained

If you're starting a business, you've got a lot of details to consider. What's your vision for the business? What products or services will you offer? What entity form is right for your business? What's your marketing plan? How's your revenue model look? Once all these bases are covered, you've still got a big question hanging over your head – how are you going to foot the bill for all the start-up expenses?

Some entrepreneurs start new businesses on a shoestring, raid their retirement funds, ask wealthy relatives for a family-rate loan, or apply for a small business loan. Another route is taking on a partner who's got money to invest, but who doesn't want to be involved in the daily activities of the business – a silent partner. What they've got to offer is capital – and specifically, venture capital. These funds are poured into a new business to get it off the ground.

Because of the risk involved in funding an unproven business, venture capital generally comes at a steep price. But if you've been turned down by other traditional funding sources, the extra interest expense incurred in using venture capital may be a small price to pay for launching your business properly. High interest rates aren't the only way venture capital deals are struck. Some investors seek private equity, royalties, or higher stock dividends as compensation for the use of their money.

Typically, the money is loaned for a fixed period – often ten years. This is almost always the case when a venture capital firm is involved. Different payment arrangements might be made when the funding comes from an individual – especially if it's a family member who's making the loan. The ultimate goal is to see the investment pay off in a substantial way, earning the investor higher than market earnings. The two business sectors currently most likely to create such a positive yield quickly are biotechnology and technology.

Venture capitalists come in a couple of varieties. Some are individuals – say, that wealthy relative, or a friend of a friend who has money to invest and is always looking for a promising business opportunity. Some venture capitalists join together to form a firm that seeks business investments. They do due diligence prior to investing, to make sure you've got every detail ironed out thoroughly. Because of the risk inherent in a start-up business, this due diligence is much more than a mere formality. Thorough knowledge about the business plan and the people who will run the business, including their education, experience, and planned involvement in the new enterprise, eliminates a portion of this risk.

Venture capitalists are not interested only in seeing your business ownership dreams become a reality – they want and need to see a profit on their investment. The risk is substantial – venture capitalists report a close to 90% failure rate in the businesses they fund. The potential reward is equally great, and just one business that enjoys wild success can far surpass the losses from the businesses that fold.