We talk a lot about venture capital on this blog; how to attract it for your business, how to increase yields from business you invest in, etc. But to those who might be new to this blog and/or the idea of venture capital this article is designed to get your mind wrapped around just what exactly venture capital means. In a nutshell venture capital is money that has been invested into a start up company that can not get money the traditional way such as getting a loan from a bank or a company that might potentially be failing and plans to restructure using the raised money. The idea of venture capital is one of high risk for high reward.
By: BMA Editorial Team A
Business needs money to grow and thrive but their business plan is not always understood by traditional banking who is not keen on risk and has criteria that isn’t generally conducive to building a better business. That’s where venture capital can help. But what is venture capital?
Venture capital keeps business booming! It is a way that new business can get start up capital and begin to thrive and it’s a way that established business could expand. That’s because venture capitalists are looking for new and innovative ventures that have the potential to have huge yields. They are not interested as much in businesses that are already flourishing they are interested in expansions that have a risk attached to them and to restructuring. Think of them sort of like a risk junkie that needs a fix.
Venture capital is money that a venture capitalist puts forward to a business venture in return for having a stake in the company. Venture capital is not a loan. Venture capitalists invest in hopes that there will be a big yield in the future that will make them a whole lot of money. That means whatever the future profits are the venture capitalist will share in it.
There is no question that venture capital is risky but it is also the main source of funding for start up companies that have few other sources they can rely on. It’s a well known fact that those with ideas have no money and those with money are often lacking ideas so venture capital is a great way to marry up the two in a way that benefits both parties.
When venture capitalists look for venture capital investments they look for a company that is small and new with a very promising future. In this way they can bring very little cash to the table and have the chance of making millions if all goes well. Although venture capitalists take big risks the gains can also be enormous.
Venture capitalists have their own team that spends their time watching what’s happening in the business front. They watch for companies that are struggling and very vulnerable but have extreme growth potential. Other capitalists will enlist the services of a private equity firm, or something similar, which has the job of matching up entrepreneur with venture capitalist.
Having an idea and a business plan is what entrepreneurs do. They are also a breed of individuals that are willing to take risk, and they are willing to lose everything, because they are confident their idea is sound and will make them money. Thankfully the venture capitalists couldn’t be bothered to come up with their own idea of what to do with their money instead leaving the ideas to you while they become the investor.
Now that you know what venture capital it, do you think it is right for your new business? Do seriously consider it, because venture capital is a way to catapult your business into an entirely different dimension…
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Part of the trick, we found, was having a well-researched and clearly articulated business proposition that clearly demonstrated a very substantial upside for investors. We cast our net wide, using our own personal networks as well as those of professional fundraisers. And while we were prepared to be flexible on terms, we refused to entertain low-ball offers.
Ultimately, though, our fundraising success came down to a few factors. Here are our secrets:
Keep it simple – The market for bottled water is well established. We had the advantage of an existing product, but that was hardly a guarantee.
We condensed the investment proposition to four essential “pillars” – the market, the source, the product and the distribution – and demonstrated how we had competitive advantages in each area.
Go with what works – A core strength of our product is the spring we draw from, located in Ölfus. Investors , we quickly learned, liked the idea of owning a part of this highly valued resource.
Emphasize the positive – Communicating success signals the potential value in your company. We were fortunate to boast a strong sales performance during the fundraising period – something we regularly communicated to potential investors. Along the way, we also highlighted our growing U.S. sales and international distribution.
Eliminate the negatives – It’s easy for VCs to say no. And it’s incumbent upon you, as the business owner, to remove the reasons for them to give that answer.
During the process, we addressed three concerns that, admittedly, were specific to our industry, but showcase what any prospective fund seeker should think of in advance:
- No track record – We ensured we had a company history, proving to investors that the product had legs.
- No distribution – We obtained distribution in US, Canada and China, showing we weren’t a product that would be landlocked in Iceland.
- No control of source – We bought the land that houses our spring, giving us the rights to the source in perpetuity.
Follow-up on all leads – We used all of our personal networks as well as those of two international investment banks to look for potential investors. We were prepared to incentivise people to find investors, offering placing commissions of up to 4 percent. We followed up assiduously on all leads giving further information, access to the data room, samples of the product and offering site visits to Iceland. A successful first meeting was always a result of a personal engagement with the project on the part of the potential investor.
In the end, roughly half of the funding has come from investors who are my personal friends, with the rest coming from South African institutional investor Bidvest.
Believe in the business – There are always dark days in a business and fundraising can be especially frustrating in the current environment. We continually reminded one another about the quality of the product and the latent demand for it in international markets.
Some potential investors offered us terms that were much poorer than the ones we finally achieved. It was our confidence in our business that gave us the strength to say no. Our existing shareholders helped support the business and the pricing by continuing to invest in the business during the process.
About the author: Icelandic Water Holdings, ehf, Chairman & Founder, Jon Olafsson has spent the last 30 years building successful companies from the ground up and transforming them into industry leaders. Best known as the chair of Northern Lights Communications — Iceland’s premier integrated media, communications and entertainment company — Olafsson has served as a critical player on the executive boards of more than 15 companies across multiple sectors including investment banking, entertainment, media, construction and land development.
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Angry Birds maker Rovio is in the process of a fundraising round that would value the company at $1.2 billion, according to a report by Bloomberg.
That would make the casual games company worth more than Plants vs. Zombies creator PopCap, which games publisher Electronic Arts bought for $750 million. Rovio is still well short of social games maker Zynga, which is valued somewhere between $10 billion and $20 billion and is looking to raise up to $1 billion in its upcoming initial public offering.
Wibe Wagemans, Rovio’s head of global brand advertising, hinted that the company was raising money at VentureBeat’s GamesBeat 2011 conference in San Francisco last month.
“We’re in fast growth mode, so we’re always on the lookout for good money,” Wagemans said. “We’re always interested.”
Angry Birds is a popular game on mobile devices in which players fling birds at structures to try to destroy pigs. It started on smartphones like the iPhone and on tablets like the iPad. It has since expanded to a large number of other platforms like web browsers and TV boxes that are powered by operating systems like Android.
The company finished raising its last round of money — $42 million – in March this year. Rovio has been expanding through 2010 and 2011 and currently has 50 employees in Finland.
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The U.S. Department of Energy announced today that it is investing $50 million in the SUNPATH program, which is designed to promote solar panel manufacturing in the United States.
The United States manufactured only 7 percent of the world’s solar panels last year, according to the Energy Department. That’s down from 27 percent in 2000 and 43 percent in 1995. Most solar panels are now manufactured in China, where more lax labor laws make it cheaper to manufacture and deliver solar panels.
“This certainly helps, but just to put it in perspective, the chinese government is dealing in billions when they support these areas, not millions” Craig Lund, vice president of business development at 1366 Technologies, told VentureBeat. “U.S. market share has dropped precipitously in the past decade while China has done a lot to subsidize manufacturing.”
The new investments, which will come over the course of two years, are geared toward companies that reduce the cost of manufacturing solar panels and scaling up solar-panel production. But reducing the cost of manufacturing solar panels won’t necessarily give the U.S. a competitive edge in producing them, Kachan & Co. managing partner Dallas Kachan told VentureBeat.
“The biggest challenge in solar-cost reduction is not module price, but balance-of-system costs,” he said. “It takes time and money to fasten panels in place, run cabling and install inverters.”
But there is renewed interest in manufacturing in the United States thanks to favorable exchange rates. That’s prompted companies like silicon wafer producing company 1366 Technologies, which recently filed for a conditional Department of Energy loan, to reconsider manufacturing stateside. The investment from the Department of Energy is a small step in that direction, Lund said.
“Generally, the exchange rate is moving in our favor,” Lund said. “The time is right. It’s as good as it’s been in a while.”
The investment is part of the U.S. Department of Energy’s SUNSHOT initiative, which is attempting to bring the cost of electricity for solar panels down to around 6 cents per kilowatt-hour. That would make it more competitive with other kinds of power like fossil fuels, which enjoy much lower costs per kilowatt-hour of electricity and do not carry the same upfront capital costs solar panels have.
Google is currently in the market looking for the next Google. Google is sinking large amounts of its ample profits into the venture capital market trying to find the next big thing. In today’s market it seems more and more companies are playing venture capitalist, and why not when a large company can benefit from its successes and buffer its losses easier. Google has said that it is using data to determine its investment choices but investors doubt this will be a successful formula given that most, if not all, of these companies are start ups and do not have much hard data associated with them yet. Given Google’s success it is a hard sell to bet against them, after all, all success comes with at least a little bit of luck–and success in venture capital is no exception.
By CLAIRE CAIN MILLER
Google thinks it can be young and crazy again. And it is betting $200 million that it is right.
In the hottest market for technology start-up companies in over a decade, the Silicon Valley behemoth is playing venture capitalist in a rush to discover the next Facebook or Zynga.
Other pedigreed tech companies are doing the same, as venture capital dollars coming from corporations approach levels last seen in the dot-com bubble era of 2000.
To some, it is a telltale sign of an overheated industry, symptomatic of a late and ill-advised rush to invest during good times. But Google says it has a weapon to guide it in picking investments — a Google-y secret sauce, which means using data-driven algorithms to analyze the would-be next big thing.
Never mind that there often is very little data because the companies are so young, and that most venture capitalists say investing is more of an art than a science. At Google, even art is quantifiable.
“Investing is being in a dark room and trying to find the way out,” said Bill Maris, the managing partner of Google Ventures, the corporate investment arm. “If you have a match, you should light it.”
Corporate venture funds invested $583 million in start-ups in the first three months of the year, according to the National Venture Capital Association, up from $443 million in the same period last year and $245 million in 2009, before tech investing began its rapid turnaround.
Today, 10 percent of venture capital dollars comes from corporations, nearing the previous bubble-era high of 15 percent in 2000. Facebook, Zynga and Amazon.com are investing in social media start-ups. AOL Ventures restarted last year after three previous efforts, and Intel Capital expects to invest more this year than the $327 million it invested last year.
Google Ventures says it has invested as much money in the first half of this year as in all of last, and Larry Page, the company’s co-founder, who became chief executive this spring, has promised to keep the coffers wide open.
Corporate venture arms have sprung into action before during boom times, like the early 1980s and the late 1990s, but they have had mixed records.
“When the corporate guys get involved, it usually means that we’re at the top of the market,” said Andrew S. Rachleff, who teaches venture capital at Stanford and was a founder of Benchmark Capital, the venture firm.
Mr. Rachleff also questioned Google’s reliance on its algorithms. “There’s no analysis to be done when you’re evaluating a company that’s creating a new market, because there’s no market to analyze,” he said. “You have to apply judgment.”
Although even Mr. Maris compares venture investing to “buying lottery tickets,” Google says it has faith in its algorithms. At the same time, it is taking the unusual step of providing the chosen start-ups with access to its 28,770 employees for engineering, recruiting and business advice, and offering office space at the Googleplex and classes on building a business.
Mr. Page, who declined a request for an interview, has already promised Google Ventures $200 million this year and says a virtually unlimited amount is available, Mr. Maris said, as Google reconnects with its start-up roots. “I’ve had conversations with Larry when he says, ‘Do as much as you can, as fast as you can in as big and disruptive a way as possible,’ ” he said.
Google says its approach is paying off. One of its investments, Ngmoco, was acquired by a Japanese gaming company, DeNA, for up to $400 million, and another, HomeAway, for renting vacation homes, received a warm welcome from investors when it went public last month. A third, Silver Spring Networks, a smart-grid company, filed to go public last week.
Google Ventures invests in various areas — the Web, biotechnology and clean technology. It puts large amounts of money into mature companies, but it is also investing small amounts in 100 new companies this year.
To make its picks, the company has built computer algorithms using data from past venture investments and academic literature. For example, for individual companies, Google enters data about how long the founders worked on start-ups before raising money and whether the founders successfully started companies in the past.
It runs similar information about potential investments through the algorithms to get a red, yellow or green light.