Opinion: Venture capitalists invest more than money

Venture capital, also often referred to as equity capital, is money raised by a business in exchange for a share of ownership in the company. Equity financing allows a business to obtain funds without incurring debt, or without having to repay a specific amount of money at a particular time. Two key sources of equity capital for new and emerging businesses are venture capital firms and angel investors, high-net-worth individual investors who seek high returns through private investments in startup companies.

Typically, angel capital and venture capital investors invest capital unsecured by assets to young, private companies with the potential for rapid growth in the hope of profiting from their investment. Such investing covers most industries and is appropriate for businesses across the spectrum of developmental stages. Investing in new or very early companies inherently carries a high degree of risk. But venture capital is long-term, or “patient,” capital that allows companies the time to mature into profitable organizations.

Successful long-term growth for most businesses is dependent upon the availability of equity capital. Lenders generally require some equity cushion or collateral before they will lend to a small business. A lack of equity limits the debt financing available to businesses. Small businesses often rely on venture capital to provide a fresh injection of equity, which can allow the company to seek new debt.

Angel and venture capital investors usually seek active involvement in the company, and almost all venture capitalists will, at a minimum, want a seat on the board of directors. Because of their business experience, many venture capitalists and angel investors invest more than their money. They also seek active involvement in the business, such as consulting and mentoring the entrepreneur. They often take bigger risks or accept lower rewards when they are attracted to the non-financial characteristics of an entrepreneur’s proposal.

Although investors are committed to a company for the long haul, that does not mean indefinitely. The primary objective of equity investors is to achieve a superior rate of return through the eventual and timely disposal of investments. A good investor will be considering potential exit strategies from the time the investment is first presented and investigated.

Venture capitalists and angel investors share many common characteristics: They seek companies with high growth potentials, strong management teams, and solid business plans to aid the angels in assessing the company’s value. They typically invest in ventures involved in industries or technologies with which they are personally familiar.

The U.S. Small Business Administration operates a venture capital program called the Small Business Investment Company. Since 1958, this program has provided about $40 billion in venture capital to American small businesses. Many small businesses that received financing through the SBA’s SBIC program have gone on to become household names, including Federal Express, Intel, Apple Computer, Callaway Golf, Outback Steakhouse and Staples, to name just a few.

Entrepreneurs interested in seeking SBIC financing can visit the venture financing page on the SBA Web site at http://www.sba.gov/INV/forentre.html.

The Web page includes several useful links on venture capital for entrepreneurs, including “The SBIC Program: Seeking SBIC Financing for your Small Business” and “Directory of Operating SBICs,” listed by state.

Sam Jones is the Region VII SBA Administrator, serving Missouri, Kansas, Iowa and Nebraska.