Venture Capital Basics for Small Businesses Rated:

Small businesses have a number of resources to choose from when they are starting out, from business grants to bank loans.

One option that may be appealing to a business that has exceptional promise for growth is venture capital. Attracting this type of funding may take a considerable amount of preparation, time and effort, but successful businesses say the rewards are worth it.

What are venture capitalists?

Venture capitalists (VCs) are finance professionals who manage a pool of capital for investment in emerging companies on behalf of other investors. VCs often focus on funding young and risky small businesses.

VCs' main focus when choosing a small business to invest in is to gain a very high rate of return. They usually maintain active investment for five to seven years. VCs also tend to take a major role in a company's development, usually through an equity stake, and may also sit on a board of directors or helping to make hiring decisions.

Venture capital firms receive numerous applications from small businesses each year and are extremely choosy in their criteria.

How do I find venture capital?

Research your options. Venture capitalists have different specializations regarding what type of firms they finance, so make sure you are approaching the ones that are right for your business. Think about factors such as how far along your business is in its development, what industry it is in, where it is located, and how much money you need.

Try to arrange a contact. Aim to narrow your list down to between six and eight potential venture capital firms. Within these, see if you can find a trusted contact who can refer you and ease the process along. Attorneys, accountants, investment bankers or other mutual business colleagues are all good options. You could also try to gain an introduction to a VC at an industry conference or event.

Seek advice. Seek out other small business owners who have been successful in attracting VCs and ask for general advice. You can also find entrepreneurs who have received financing from the specific VCs you are thinking of approaching. You can find these owners at events devoted to venture capital opportunities, such as seminars or business fairs.

What are venture capitalists looking for?

Strong management team. VCs like to see a team of managers who are experienced and knowledgeable about the industry. Show how your team has a diverse set of skills, with strong credentials. If possible, provide evidence of how your management team has worked successfully together in the past.

Promising products or services. Show VCs that your products or services fill a large and untapped niche in the market and construct a compelling argument for why now is the right time for investment. Also showcase any innovation related to products or services that highlights your business as a unique opportunity.

A solid business plan. Just like when you apply for business grants or a bank loan, VCs expect to see a strong business plan. However, most VCs do not want to look at the entire plan initially, so prepare a concise summary of the investment opportunity to engage their interest.

High return on investment. Prepare detailed financial statements using your small business software so that VCs can better assess their potential return on investment. What are current and future sales, earnings and dividend projections? How much money has already been invested? Will your current capital request be adequate?

Likelihood for acquisition, merger or IPO. The VC will be thinking about their exit strategy, so it will help your case if you can demonstrate that your business could be a good candidate to be bought by another company or to go public.

Good presentation. Before presenting your case to VCs, make a point to know your business inside and out. Be prepared to answer any questions the VC might ask. If possible, take a course in sales, presentation or public speaking to help

A good relationship. Because VCs typically take a stronger role in a growing business than angel investors or passive lenders, they will be looking for a team that is a good fit. (show them you are willing and able to work together.)

What else should I keep in mind?

Because VC funding is so competitive, it is important to have a backup plan for financing your small business. Equity investment, short-term loans, business grants and angel investors are some other options you may want to pursue simultaneously.