Venture capital firms, such as Woodside Funds, are intent on making a high return on their investment. In addition to financing they provide contacts, and other assistance to new businesses and monitor their operations. To obtain financing from a venture capital firm, entrepreneurs must first get an initial meeting with the firm where they can explain their project. Providers of venture capital say that a entrepreneur can attract their attention by submitting a business plan that captures the business model, financing requirements, and prospects of the company.
It also helps to have connections to someone inside the venture capital firm. Venture capital firms invest in only about 1 percent of the proposals they receive. They prefer to invest in large, demand-driven markets with a great deal of perceived consumer need. Managers of start-up firms say that it is easier to raise $10 million than small incremental equity investment and that they have to put their own capital at risk to make their firms successful.
Firms such as Blockbuster have used venture capital firms. Angel investors invest their own money in firms that venture capital firms may not invest in, but they are difficult to find. A strong management team is important in selling the business plan to either angel investors or venture capital firms. Some firms have to go public to obtain the funds they need to grow. Venture capital firms plan to harvest their investment within a few years and often take companies public in order to cash out their positions
Questions
1. What role do venture capital firms play in financing and monitoring small firms?
2. Why do venture capital firms prefer to invest in firms that have a high level of perceived need?
3. What are angel investors? How do they provide funding for new firms?