Venture Capital is Attracted By Businesses With Unique Products,
a track record and ambitious plans.
Venture capital investors primarily seek their financial reward from an uplift in the value of the business
(with expansion supported by their funding injection) over a specific medium term time frame e.g. 5 years. Often
they get their return when the business goes to public listing on the stock exchange.
The Cost
Because of the perceived risk of their investment, venture capitalists require a significant ownership share of the
target business, typically 40% or more. Success fees may also be required.
This can sometimes come as a shock to the self-made business owner who is used to guarding his equity closely,
and has strong opinions about the future of the business. So it must be seen as means to an end; if the business
has truly strong growth prospects but needs capital, the owner must take the view that it is better to have 50% of
something big (potentially), than 100% of something small.
Advantages
The main advantage of any form of equity investment when compared to borrowing, is that the business has some
breathing space to grow while no interest is payable on the invested funds, and the reward to the shareholder is
only payable if the business is successful.
Although they don't usually take a day-to-day role in the business, venture funders have a wealth of business
experience to bring to the board-room table, and can play a valuable mentoring role. And as well as providing
access to larger funding amounts, their presence in the business can help to position the business well when
seeking additional funding from other sources.
A Business Plan is Necessary
A strong business plan showing high earning potential and unique selling or competitive advantage, together with a
proven track record and strong management are typically necessary to attract venture capital interest. Because of
this, such funding is less available in start-up situations.
Business angels can effectively fill a need for capital funding in situations which do not meet the
venture funders' requirements. Business angel networks are typically made up of wealthy individuals who are looking
to invest in high growth businesses. They often have a specific industry sector focus, and can bring a wealth of
business experience and contacts to the table.
Because of their flexibility, business angels can be quick decision-makers and work with smaller investment
levels and even startup or early development businesses. A strong business plan will normally be required, and a
significant equity percentage plus contingent fees will be negotiated.
There are a number of other high wealth families which regularly invest in high growth startup and
business development opportunities, although there is at present no comprehensive public listing of such investors.
Investments are often made quickly and without lengthy diligence, since they will apply their own experience and
resources to the assessment of the opportunity.
However it should also be said that businesses which are less prepared for investment in terms of their degree
of organisation, and perhaps the lack of a formal business plan, will have far less negotiating strength.
Where Are They?
There is no single authoritative source of Australian private equity funding sources. However here's a
few information sources:
http://www.avcal.com.au/
http://www.businessangels.com.au/
http://www.australianinvestmentnetwork.com/home
http://www.assob.com.au
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