In the late 1990's, the Internet provided a new frontier in which entrepreneurs could try their hand at plying a trade or developing a new enterprise. While "start-up" madness may have subsided when the dot.com bubble burst in the first few years of the new millenium, it hasn't gone away. Whether on the Web or in traditional brick-and-mortar businesses, entrepreneurship is alive and well, and the problem of obtaining start-up capital for new business ventures is usually topic number one when the idea for a new business is born. Following is an overview of the venture capital process and what you can expect if you are thinking about starting a new business.

Sources of Venture Capital

So, you think you've got a great new idea?  You believe that everyone would want your product, if only you could produce it.  Where do you begin?  Unlike in the past, obtaining funding today is a complex and formal dance of give and take.  It is important to be aware of the patterns and progressions before stepping onto the dance floor. A venture-capital funded entity, generally, will go through four stages of development.  Sources for funding will vary depending on where the company is on this time-line.

The "Start-Up" Phase

During the first stage, appropriately called "start-up,"  foundation money and seed capital funding is needed.  Usually, the first line of attack during this phase is the entrepreneur(s)'s family and close circle of friends.  It is important to get at least one financial partner from this inner circle.  Outsiders often will not have faith in a project where the entrepreneur has no demonstrable faith from close associates and family.  However, the entrepreneur must be sure that this first offering complies with exemptions from federal and state registration requirements.  This is to assure that the business does not give initial investors any rights that will encroach upon the venture's ability to attract other investors in the future.

Next, the "angel investor" is a remarkable boon to any company fortunate enough to attract one.  Angel investors are individuals with large net worths who have a desire to invest seed money in start-up companies.  The market for angel investors is private and informal.  Angels usually are found by word of mouth.  However, a trip to the local council on foundations for private donor information could prove helpful.  The U.S. Small Business Administration estimates that, nationwide, there are approximately 250,000 active angels investing in about 30,000 companies each year.

Finally, it may be possible to obtain funding directly from your local city and state governments.  Cities have become much more interested than before in attracting new companies to their economic base.  Therefore, they have become very assertive in offering creative financial packages.

Development Stage           

The second stage of a venture capital funded company is called the "development stage."  In this stage, the company is actively attempting to develop its main products or  services.  Companies in this phase typically seek investment dollars from private sources such as angel investors or venture capitalists.  Due to the difficulty of raising capital at this risky stage of a company's development, initial public offerings (IPO's) may be possible as an alternate means of obtaining funding.  The downside, of course, is that entrepreneurs lose a great deal of personal control when companies "go public."

Maturity Stage           

The third stage is call "maturity."  During this stage, companies with established track records may obtain additional or "expansion" funding from venture capitalists or from conventional banking sources.  Also, some investors who come in on the ground floor may establish a plan for investing that progresses in installments.  After each installment is paid, the investor will wait to see that predetermined criteria are met before advancing the next installment.  In addition, satisfied customers and strategic partners sometimes provide another source of venture capital at the "mature" stage.  This is especially true if the company's customers are other institutions with a desire to form a future or continuing business relationship with the new company.

Growth Stage

The last stage, sometimes called "growth," includes strategies for the investors to exit the enterprise, collecting their financial returns or mitigating their losses as they go.  In each of these stages, conventional wisdom counsels against using a "finder."  Finders often call themselves venture capitalists, consultants, investment bankers, lawyers, accountants, or business advisers.  Sometimes they will help with writing the business plan, management-team recruitment, or in establishing a Board of Directors.  However, they can come at high price tag, and the work may be that which the entrepreneur could produce her or himself.