Sunday, October 24, 2010

Venture Capital - Money In Stages

The idea of pursuing venture capital is a prominent for most businesses looking to have a go at becoming a publicly traded company. The capital requirements for growth on such a large scale are usually measured in numbers with lots of commas. Bankers faint at such proposals, but venture capital funds do not. That being said, it doesn't mean you are going to get one big lump of money to do with as you please.

What do people do when they win the lotto? There are shows that track them down years later. Do you know what they show? The people usually blew most of the money on flashy items and useless stuff. They are usually broke or heading in that direction and wish they had never won the lotto to begin with. Why do I mention this? Because venture capital fund managers tend to view companies the same way.

What happens when a company has more money than it knows what to do with? It loses focus. Take Google. By all measures, the company is a wild success. It has a great search engine system and Android certainly seems to be a real winner. That being said, it also spends money on lots of projects that never have a hope of turning a dollar of profit. That is okay because the company is established, but not okay for a company trying to get into the big time.

It is important to understand that a Venture Capital Fund is not going to just dump millions in the bank account of your business. Not a chance! Instead, the manager of the fund is going to negotiate a total funding amount with you and then establish milestones which if met will result in further funding. This is known as "staging". If you meet the first stage in a timely manner, you get "x" amount of funding. You then have to meet the second stage in a timely manner to get an additional amount of funding and so on.

The key word in the previous paragraph is "negotiate". Many businesses are so excited to get funding that they agree to practically anything, including milestones that cannot realistically be met. This leads to burnout, excessive consumption of adult beverages and disaster sooner or later. That is the last thing you want to happen, so negotiate milestones that can be realistically reached.

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