Introduction
Most small businesses require capital to manage to penetrate the market well as expand over the years. Venture capitalists use the opportunity to offer financial assistance to the entrepreneurs however they rake up part of the ownership in the business (Gordan, 2012). Bill Reichert has a lecture on the ten lies entrepreneurs give investors, and it offers funding options to the business owners. SBA has an obligation in bridging venture capitalist funding sources as well as the application process for entrepreneurs to gain funds.
Lies Entrepreneurs tell Venture Capitalists
Based on Reichert’s lecture on YouTube, entrepreneurs need to learn some issues to enable them access funds from the venture capitalists successfully. An entrepreneur needs to have long-term projections of where he or she wants the business to be in the two or three years. One does not have to be accurate, but it is important to have a goal. It is important for the entrepreneur to have a specific market one’s products or services are targeting and abilities to meet the demands of that market. Competitive products are preferred by venture capitalists as there is a demand for the products (Elsas, Flannery & Garfinkel, 2014). It is important for the entrepreneur to realize that one’s venture capitalists enter the business, the ownership belongs to the investors, employees and him hence any decisions made must be approved by the respective parties.
Small Business Administration (SBA) helps small business owners when seeking venture capital funds. It delivers contracts, loan guarantees, loans and counseling sessions to these businesses. The SBA has a Small Business Investment Company (SBIC) program which uses the expertise of qualified private investment funds to offer funds to entrepreneurs. It licenses the funds as part of SBIC and then supplements the capital from private investors to assist small businesses. The finances gathered and distributed to promising businesses within the United States that require equity financing or are in debt. Businesses seeking SBA’s assistance, therefore, need to be promising.
Funding Strategies
The Small Business Advocate (SBA) website has addressed some funding strategies as well as venture capital programs available for small businesses. Some of the strategies addressed are the use of loans, angel investors, friends and family, bank financing, crowdfunding and venture capital. Various interview posts within the website will be used to identify the difference between equity capital and venture capital for a business requiring a second round of funding for the company; entrepreneurs have to secure capitalization for their firms.
Equity capital and traditional financing sources
Traditional financing is the use of a line of credit or loan secured through a financial institution. One of the main traditional financing sources is small business loans through the small business administration finance program or the bank. Venture capitalists place the expertise and money into a business and get particular returns from it (Gleeson, 2013). Angel investors are networks or individuals placing their money in businesses that can make decent returns, and the business owner can control the business. Private and public grants are also referred as a traditional financing source, and a business does not have to pay back the money. Friends, family, and microfinance are also part of traditional financiers.
Traditional finance options are debt capital as they just offer financial support to an entrepreneur and do not lead to ownership of the business except for venture capital. Venture capital is reliable when the business immature as at that stage, an entrepreneur finds it hard to pay back a loan as the business has not grown. The cash flow is weak and unpredictable, and the business lacks a good track record or brand recognition. Debt capital, on the other hand, is preferable when cash flow is predictable and strong, and one has no intention of giving away more equity in the business. As a business seeking a second round of funding, it is important to focus on venture capital and not other traditional sources of finance as the business has not yet grown and it will be hard to guarantee the lender that the business will manage to return a given amount of money within a specific period.
Equity capital and Venture Capital
Equity financing is the process by which a firm raises capital by selling part of its ownership through the sale of shares. In equity capital, investors focus on mature and established firms in the market to increase revenue in the firms. The investors bear the risk of losses in the firm as well as enjoy profits within the firm (Robb & Robinson, 2014). They, however, have control over the firm after the buyout as most firms sell over 50% of its ownership to investors. Cash or debt can be used to finance the firms. Venture capitalists on the other hand focus on start-up businesses in particular industries such as technology. They invest in 50% or less of the firms’ equity hence have minimal control over the firms. They deal with equity when offering funds and their expertise.
Angel and Venture Capitalists
There are things that venture and angel capitalists look for in an entrepreneur to support them. The management team is important as its skills and knowledge will influence the performance and success of the business venture. The market size offers a financier information on how viable the business idea is and if it will be successful in the coming years. The entrepreneurs need to be willing to offer a minimum of 20-25% of the firm ownership to the investor because he or she will be offering money to support the project.
Minimal ownership discourages venture capitalists. Entrepreneurs require a clear and complete business plan and vetted through surveys and market research. Additionally, investors prefer entrepreneurs focusing on small and weak market players instead of a business with dominant players (Hellmann & Thiele, 2015). Any investor focuses on a business idea with a competitive advantage over others in the market. It reveals that the business will solve the market gap in the market and attract buyers hence high sales. The business also needs to ensure that it has benefits to a buyer and the entrepreneur needs to enable the venture or angel capitalists why the product being offered is a must have in the target market.
Options and Alternatives of Securing Capitalization in a Business
Businesses require capital whether they are start-ups or established. There are various options entrepreneurs have to acquire capital for their businesses. There are private, and government grants offered majorly on products that have educational or community benefits. Consumer crowd funding can be used whereby buyers purchase the product before it is made thus raising money to work on it. Investor crowdfunding can offer capital when different angel investors form a group to fund small businesses (Kerr, Nanda & Rhodes-Kropf, 2014). Revenue from the business can be used to fund the business. Friends and family can also offer capital especially if they are wealthy. Banks and microfinance enable entrepreneurs to make savings and acquire funds from their savings to start a business. The SBA program, for instance, offers loans however one has to use personal finances to guarantee the loan. As a business seeking a second round of funding, one can use the above options however venture capital is the best option.