How to get VC

Advantages of Venture Capital

Venture capital has a number of advantages over other forms of finance, such as:

Finance

The venture capitalist injects long-term equity finance, which provides a solid capital base for future growth. The venture capitalist may also be capable of providing additional rounds of funding should it be required to finance growth.

Business Partner

The venture capitalist is a business partner, sharing the risks and rewards. Venture capitalists are rewarded by business success and the capital gain.

Mentoring

The venture capitalist is able to provide strategic, operational and financial advice to the company based on past experience with other companies in similar situations.

Alliances

The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners and, if needed, co-investments with other venture capital firms when additional rounds of financing are required.

Facilitation of Exit

The venture capitalist is experienced in the process of preparing a company for an initial public offering (IPO) and facilitating in trade sales.

How does the professional Venture Capital industry work?

Venture capital firms typically source most of their funding from large investment institutions such as superannuation funds and banks. These institutions invest in a venture capital fund for a period of up to ten years.

To compensate for the long-term commitment and lack of security and liquidity, investment institutions expect to receive very high returns on their investment. Therefore, venture capitalists invest in companies with high growth potential or in companies which have the ability to quickly repay a high level of debt - as in the case of a leveraged management buyout.

Venture capitalists typically exit the investment through the company listing on the stock exchange, selling to a trade buyer or through a management buyout. Although the venture capitalist may receive some return through dividends, their primary return on investment comes from capital gain when they eventually sell their shares in the company, typically three to seven years after the investment.

Venture capitalists are therefore in the business of promoting growth in the companies they invest in and managing the associated risk to protect and enhance their investors' capital.

Selecting the Venture Capitalist Investor

AVCAL represents most venture capital organisations in Australia. The AVCAL Directory of Members provides basic information about each member's investment preferences and is available from the association.

Before selecting a venture capitalist, the entrepreneur should study the particular investment preferences set down by the venture capital firm. Often venture capitalists have preferences for particular stages of investment, amount of investment, industry sectors and geographical location.

Once a short list of potential venture capitalists has been drawn up, it is often a good idea to contact the venture capital firm and request a copy of their publications, which will clarify the type of investments they favour.

An investment in an unlisted company has a long-term horizon, typically four to six years. It is important to select venture capitalists with whom it is possible to have a good working relationship.

Often businesses do not meet their cash flow forecasts and require additional funds, so an investor's ability to invest further funds if required is also important.

Finally, when choosing a venture capitalist, the entrepreneur should consider not just the amount and terms of investment, but also the additional value that the venture capitalist can bring to the company. These skills may include industry knowledge, fundraising, financial and strategic planning, recruitment of key personnel, mergers and acquisitions, and access to international markets and technology.

Legal Terms

It is likely that a shareholders' agreement would be prepared containing the rights and obligations of each party. This could include:

• Amount and terms of investment.
• Dividend policy.
• Composition of the board of directors.
• Reporting - management reports, monthly accounts, annual budgets.
• Liquidity (exit) plans.
• Rights of co-sale.
• Warranties.
• Matters requiring venture capitalist approval (such as auditors, employment contracts, major asset purchases, major debt obligations and significant variations of plans).