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What are the typical steps involved with venture capital?

As discussed last week in this blog, there is a concern about a slowdown in the commercial real estate market in the coming year. The potential slowdown facing Florida businesses is due to many factors, including potential financial issues.

Accordingly, many business owners may be addressing financing issues in the near future. One such method of financing that may be pursued by some is venture capital, which is a kind of equity financing addressing the needs of some companies that cannot seek capital from more traditional sources like banks. Typically, venture capital investments are made as cash in exchange for shares, along with an active role in the company that is being invested in. Thus, it differs significantly from traditional means of financing.

Typically, a startup or other company looking for venture capital begins with submitting a business plan that is reviewed by the venture fund. The venture fund then performs its due diligence on the business, which includes examining the company’s products, management team market, financial statements and other considerations.

If the venture fund is interested in proceeding after these steps, the investment is then made in the company in exchange for some equity or debt. The terms of the investment can vary depending on the company’s performance and other factors. The investment is often made in rounds rather than a single investment at once.

The venture fund then becomes involved in the company and its continued performance. Ultimately, the venture fund then exits the company, which might be four to six years after the initial investment in many cases, although the specific timing will depend on the circumstances of each case.

Source: U.S. Small Business Administration, “Venture capital,” accessed on Nov. 26, 2016

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