The venture capital industry exists to help entrepreneurs turn business ideas into actual, functioning businesses. Most business ventures fail, but there is the occasional home run that can pay for many earlier failures. Other business ventures may not turn the initial founders into billionaires, but can turn into steady businesses that create jobs and incomes for employees and the upper management team. Below is an overview of the stages of venture capital funding, and the most likely parties to secure funding to turn a business concept into reality.
SEE: Starting A Small Business: Introduction
Invest in Yourself
In an ideal world, an individual with a business idea would also have the startup capital to see the idea turned into a fully functioning operation. The reality, of course, is that those with a potentially lucrative idea usually must seek outside sources of funds to make the business idea a reality. Frequently though, individuals can fund the initial idea generation, including creating a business plan and the necessary market research it requires. They should also have some early capacity to apply for patents, establish trademarks and start to develop any related protective measures for the idea, and begin to formalize the underlying product or service enterprise. Funding levels can range from hundreds of dollars to several thousand.
SEE: 4 Steps To Creating A Stellar Business Plan
Seek Out Friends and Family
Closer friends, family and colleagues can help an entrepreneur to the next stage of development. This initial outside network is most likely to take a flier on an unproven idea and lend support, whether it's through volunteering time or providing financial resources, based solely on the individual's reputation and ambition to develop a business enterprise. This funding level can usually range in the tens of thousands of dollars up to a couple hundred thousand. Go down this path with caution, however, as collaborating with friends and family on a business venture is one of the most common small business mistakes.
Get on the Radar of Professional Investors
The professional level is where entrepreneurs can look to raise some serious capital. This class of investor is going to be much more sophisticated and have access to or control of much larger pools of money. Having a professional on your side will also help you avoid expensive small business mistakes. High on this list might be an angel investor, who might simply be a wealthy individual that might not technically qualify as a professional, but given his or her level of sophistication and success is going to be more savvy than the previous funding sources. The primary professional category is going to include venture capital firms. These can be smaller firms that also help seed smaller startups, but can also run to very large shops that are used to raising millions of dollars for the most compelling ideas.
Reach the Final Exit Strategy
Eventually, a business should achieve a significant level of success and no longer be considered a startup or early-stage firm. At this stage, it is time to look at exit strategies. A typical exit strategy will include an initial public offering or buyout from a rival or large investment group that might be interested in harvesting the business for steady profit generation. This stage is usually meant to bring the initial founding group some liquidity from their earlier investments and sweat equity.
The Bottom Line
Not all business ventures are going to follow the above progression. Some ideas are just too compelling to start on the ground floor and are likely to capture the attention of a large VC firm. Other companies, such as software firms, may not require much initial capital and can be developed via thousands of hours of computer programming and coding. Capital-intensive businesses, such as large equipment or machinery, may take billions of dollars that only the largest incumbent firms can overtake. When it comes to securing venture capital, an entrepreneur has several options based on his or her preferences and available resources.
SEE: How To Attract Investors For Your Small Business