Q: What is a venture capitalist?

A: Venture capitalists are individuals or companies who provide investment capital and management expertise to new businesses.  In return, they will ask for an equity position in the company, usually in proportion to their risk and the amount of their investment.  They have a stake in your company because their future returns are tied to its performance.

Q: How does a venture capitalist get involved with my business?

A: Venture capitalists effectively buy their way into the company with their investment.  That means that the company will not have to repay the capital; rather, venture capitalists expect to take their return in capital gains.  The company will have a sizeable amount of money to work with, while the venture capitalist takes an active role in managing the company to ensure it success.  After all, the venture capitalist has just bet a great deal of money that your company will be a winner.

Q: What role will the venture capitalist play?

A: A venture capitalist must be seen as a partner.  His or her active management participation may occur through membership on the board of directors, or through input into other management decisions.  The venture capitalist's goal is a high (30-40 percent per year) return on the investment over the period of his or her involvement, which is typically four to seven years.  This means that the company must follow an aggressive growth strategy.

Q: How can a venture capitalist benefit my business?

A: The resources and expertise of a venture capitalist not only bring money without the requirement of regular repayment by the company, but also provide several other less tangible benefits.  The venture capitalist shares a common desire for success with you, and should not be thought of as a lender. He or she contributes expertise, experience, contacts, and discipline.  The presence of a venture capitalist also lends credibility to the company.

Q: What is a venture capitalist looking for?

A: The strength of a company's management team can be more important to a venture capitalist than the company's product.  This year's most promising product may be eclipsed by next year's new technology, but a good management team can foresee and work through such difficulties. A venture capitalist wants to see a capable, committed set of managers who are adaptable and comfortable with growth and change. A venture capitalist is always looking for a high rate of return.  The earlier your company is in its business cycle, the higher that rate will have to be to compensate the venture capitalist for his or her risk.  This means that the company must be positioned for rapid growth, in terms of both management and product.

A venture capitalist also wants to see a realistic set of financial projections and requirements.  He or she will take a conservative view of your company's chances for profit and success.  It is helpful to emphasize financial requirements for this stage in your company's growth.  Showing a realistic reflection of the company's financial state shows discipline and the ability to plan for the future.

The owners' commitments to the business through personal financial stakes are also key.  A venture capitalist will be leery of investing money in any enterprise in which the principals are unwilling to invest their own. 

Finally, the venture capitalist will want a clear exit strategy -- how to get his or her investment and return back out of the company.  Some preferable exits are through an IPO or the sale of the company.  However, other methods include management buyout, corporate redemption, forced receivership, sale of shares to principals, or sales of shares to other equity partners.