Prospective business owners may approach other individual investors to get money for starting their businesses. A large number of private individuals invest in others’ entrepreneurial ventures. They are primarily people with moderate to significant business experience but may also be affluent professionals, such as lawyers and physicians 1.
These other individual investors are collectively known as venture capitalists. A venture capitalist is a person who invests in a business venture, providing capital for start-up or expansion (Susan Ward, The Balance). Venture capitalists are sometimes flooded with business ideas and business opportunities from entrepreneurs that need investment in their ventures.
Let’s have a closer look at venture capitalists.
Other individual investors – venture capitalists
The majority of venture capital (VC) comes from professionally-managed public or private firms who seek a high rate of return. Therefore they (typically) invest in promising start-up or young businesses that have a high potential for growth but are also high risk (The Balance).
Venture Capitalists usually are heavily involved with the businesses that they have funded. Although money is important to VCs, they must also protect their investments. Therefore they engage in activities that help give each company its best chance to succeed 2. However, the over involvement of VCs may result in entrepreneurs losing their autonomy…
What make a ‘good’ venture capitalist?
As VCs usually chooses the most promising business ventures to finance, so should prospective business owners identify the best of them. Quora.com listed the following characteristics that good venture capitalists have:
- Being a great net-worker. Having the right people to talk to during the diligence process and making the right introductions (to potential employees, customers and acquirers) is a major way that VCs can add value.
- Being a great listener/being able to read people. These are the key characteristics to becoming a great VC. The ability to truly understand where an entrepreneur is coming from helps in evaluating entrepreneurs.
- Ability to predict the future. Everyone has access to the same basic market research data but taking that data and interpreting it and turning it into actionable investment ideas is a good skill to have.
- Sales/persuasion ability. Being able to convince entrepreneurs to work with your firm versus another. Also, convincing a key employee to join a portfolio company and convincing a potential customer to work with a portfolio company. These are all examples when sales and persuasion skills come into play.
- Negotiation skills. To help negotiate a top-dollar acquisition for a start-up in your portfolio and being able to negotiate the lowest possible price when it comes to making an investment.
- Experience – there is definitely a learning curve and many lessons that can be gained with time.
- Luck – venture is an extremely hits based business. One great investment can make a whole fund successful. It is impossible to know if making an investment was luck or skill but there is definitely an element of both.
Other individual investors will fund your business only if the potential rewards outnumber the risks by far. They want a return on their investment and, if they are shareholders, they will involve heavily with your business. Failure to receive funding from a venture capitalist, however, does not indicate that the business plan is not a good one. More often, the venture is simply not a good fit for the investor.
Remember, you need a well researched and written Business Plan to get your business off to a good start!
- Start your Business: Borrow Money from Friends and Relatives;
- Using Personal Savings to Start Your Business
- Borrowing Money from a Bank to Start your Business
- Bootstrapping – starting a New Business with Your Own Money
1 Longenecker, J.G., Moore, C.W., Petty, W. and Palich, L.E. 2005. Small business management: An entrepreneurial emphasis, South-Western College Publishing, A Division of International Thomson Publishing Inc.
2 Kressel, H., 2007. Competing for the future: How digital innovations are changing the world, Cambridge University Press.