Research

Start-ups Can Raise Funds from Venture Capital Market

Getting access to a loan to invest in a start-up venture can sometimes be daunting.

This is because many lending institutions, especially commercial banks, are leery of lending to start-up ventures, terming them as mere conceptual business ideas yet to be proved feasible and therefore full of potential risks.

Instead, most banks are comfortable lending to individual entrepreneurs against their personal assets or regular income than to extend a loan facility to a new business venture against its projected cash inflows.

Many budding entrepreneurs lack a regular source of income to accumulate significant savings for a start-up capital and subsequently are devoid of tangible assets to present as collateral to borrow against.

Consequently, their only resort lies in seeking venture capitalists as a potential source of start-up capital.

Venture capital outfits are those that specialise in funding business ideas drawn in proposals where they see an investment opportunity with feasible growth prospects.

While the majority of venture capitalists do invest in business ideas that are still in the conceptual stage and yet to be tried, they differ in their investment preferences.

There are those that prefer to fund seed capital for start-ups that are still at the conceptual phase, while others are interested in late-stage investing where they go for going concerns with proven performance records.

As a lender of last resort, especially for budding entrepreneurs, venture capitalists are extremely cautious about where they plough their money and the nature and potential of the investment that they fund.

 

Remember, they are business ventures out to make profits from the plans that they fund.

They are simply interested in putting their money to work in proven business ideas with some potential in terms of returns on investments (ROI).

Forecast to Earn

Although they have a significant amount of capital available for investment, venture capitalists are never motivated by the number of investments they fund but by the amount of returns they forecast to earn from a single business idea.

A venture capitalist firm may receive over 1,000 business plans in a year, invite only 50 teams for plan presentations and finally settle on three to seven potential ideas to fund.

It is easier for an uncreditworthy entrepreneur to secure a loan facility from a commercial bank than it is for a business plan to win the mercy of a venture capitalist.

Why? Venture capitalists have limited funds to invest in relation to the numerous business plans they receive from entrepreneurs.

But then, what should an entrepreneur do to win the mercy of a venture capitalist against the numerous competing business ideas.

Ask anyone on the street on how to sell one's self in a competitive job market and you will be surprised by the level of conversancy that you will observe.

Most local entrepreneurs tend to be more conversant and readily equipped with the skills of how to sell themselves in the job market than they are of how to sell their potential ideas to venture capitalists.

Similarly, they extend these job-searching skills into their hunt for venture capitalists.

Interestingly, some budding entrepreneurs walk into a venture capitalist firm to sell their ideas verbally, while others resort to dropping in their business plans and leaving success to chance.

It is surprising that many entrepreneurs do not bother to conduct proper research or make good preparations before embarking on hunting for funding from venture capitalists.

The outcome is that the business plan is rejected outright at the point of initial reading.

And even later, after several applications of the same type, the plan is never considered for shortlisting for presentation.

Quite Competitive

The venture capitalist market is not analogous to the job market. The former is quite competitive as there are few firms against numerous applicants.

The competitiveness sometimes goes beyond the entrepreneur's influence, to the level of outlook or attractiveness of the industry within which the prospective business lies.

For instance, two business plans in different industries could be competing for the venture capitalist's attention with each promising a substantial rate of returns on capital.

In a cutthroat scenario where the two business plans promise equivalent rate of return and the venture capitalist can only finance one business plan, the bar would be raised to the industry outlook.

Only a business plan that lies within an industry with a promising and positive outlook will carry the day.



Isaiah Opiyo is a financial consultant with Money-Plan Advisory & Solutions.

This article appeared on www.businessdailyafrica.com on 11 January 2011.

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