Venture capital is an investment that a financier makes in your company in order to get a return on the investment. Read here about how to prepare to apply for venture capital.
Advantages and disadvantages of venture capital
One advantage of venture capital is that you have resources to be able to invest in your business and can develop it faster. It also gives the business an advantage because there are no interest payments required on the capital. A venture capitalist will usually have expertise and contacts to help you develop your business.
One disadvantage of bringing in an external investor is that it reduces your control of your business. A venture capitalist will often demand quick growth. Comprehensive and regular reports on how the business is progressing will also be required.
You should also consider where the venture capital money comes from, and ensure that your personal values and those of the business align with the venture capitalist. This is essential to ensure a long-term relationship. If you are running a value-driven business that strongly communicates its values, there are also risks in accepting capital from an investor who is not in accord with those values.
How should you pitch your idea for best results?
When pitching your idea, investors always want a well thought-out business plan. It must be clear why the investment will be profitable and the company successful. You also need to describe the people who run the company and what they can contribute to the business concept. Then there should be information about the product and the market the company is targeting. There should also be a marketing plan in the business plan.
Make realistic forecasts
Venture capitalists expect well-founded forecasts of revenues and costs. To justify your forecasts, you must have a marketing plan that shows how the market will be approached. You should therefore be as concrete and clear as possible in your business plan and presentations. Do not promise more than you can deliver.
Build and use your network
It is important to show that you have the skills and the network to make your business concept or project a success. If there is a lack of skills, it is necessary to think about how to get them, for example through recruitment, skills development or by finding new partners.
Valuing your business
You and the investor need to agree on how much money is needed and when. The value of the company and the investor's contribution should also be assessed. The terms of the partnership itself are governed by a shareholders' agreement. An important part of the valuation of a company is what debts and contracts the company has. An investor will always review all the contracts entered into in the business before making an investment.
It usually takes between two and six months to get access to the money, depending on the size of the investment and the difficulty of assessing the project's potential.
The valuation is influenced by how much has already been invested in the project in terms of, for example, labour time and expenses and what the company is expected to be worth when the investor plans to sell their stake.
Take advice from as many people as possible
Take advice from as many people as possible who have expertise in the investment process. This could include accountants, lawyers and bankers who can help make your prospectus as realistic as possible and also clarify the various conditions for a venture capital investment. Public organisations such as Almi and Innovationsbron can also be useful to contact for further assistance. If you have the opportunity to be an incubator company, this will be very helpful in the process of seeking venture capital and connecting with business angels.
Requirements and conditions
A general requirement for companies seeking venture capital is that the business form should be a limited company, but the sector may vary.
Investors look primarily at whether the company has the potential to grow and become profitable. It is therefore important that you have conducted market research and can show that there is a demand for the product.
What is venture capital?
Venture capital is capital invested in companies where the investor receives shares in return for their investment. The investor sells their shares after a certain period of time and expects a certain return, but also risks losing their capital.
Venture capital is mainly invested in companies/projects with high growth potential and good profit opportunities.
The investor takes a higher risk than other financiers such as banks and other lenders, hence the name venture capital.