Many companies are nanced by smaller investors in

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Unformatted text preview: y and the kind of money you need. There is an enormous difference, for example, between a high-growth Internet-related company looking for second-round venture funding and a local retail store looking to finance a branch store. In some of the following sections of this chapter, I want to talk more specifically about the types of investment and lending available. • Venture Capital • “Sort-of” Venture Capital: Angels and Others • Commercial Banks • The Small Business Administration • Other Lenders Venture Capital The business of venture capital is frequently misunderstood. Many start-up companies resent venture capital companies for failing to invest in new ventures or risky ventures. People talk about venture capitalists as sharks — because of their supposedly predatory business practices — or sheep — because they supposedly think like a flock, all wanting the same kinds of deals. HURDLE: THE BOOK 22.2 ON BUSINESS PLANNING This is not the case. The venture capital business is a business, and the people we call venture capitalists are business people who are charged with investing other people’s money. They have a professional responsibility to reduce risk as much as possible. They should not take more risk than is absolutely necessary to produce the risk/return ratios that the sources of their capital ask of them. Venture capital shouldn’t be thought of as a source of funding for any but a very few exceptional startup businesses. Venture capital can’t afford to invest in start-ups unless there is a rare combination of product opportunity, market opportunity, and proven management. A venture capital investment has to have a reasonable chance of producing a tenfold increase in business value within three years. It needs to focus on newer products and markets that can reasonably project increasing sales by huge multiples over a short period of time. It needs to work with proven managers who have dealt with successful start-ups in the past. If you are a potential ve...
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