“It takes money to make money,” as the old saying goes. And in most cases, it’s true. Especially today, if you’re in the tech sector or other high-risk industries, you probably need more money than you truly fully realize. The larger and more complex your objective, the more you’ll need to make it happen.
The goal of venture capitalists like Carter Reum is to fund these businesses in exchange for equity in the company. The company stands to gain from this relationship, and the investor makes a profit on their investment.
Before diving into how venture capitalists can help your business, let’s look at how many businesses get their start.
Starting the Start-Up
Many businesses get their start the same way; the founders put everything they have into it… heart, soul, and wallet. Before becoming a venture capitalist, Carter Reum was a founder himself. Other ways a start-up can fund its operations include
This starts with the founders themselves. Hiring is kept to a minimum, so founders frequently wear many (if not all) hats while getting things up and running. They can also seek funding and assistance from friends and family. The goal is to make a profit as fast as possible.
This runs on the idea that a small amount of money from many people can result in a huge investment. Supporters are often promised free products or other perks when the business is up and running. This requires the enthusiastic engagement of supporters; without a noteworthy following, a business will likely not meet its funding goal.
Traditional lenders are hesitant to fund start-ups because they like to see a profitable balance sheet with some history behind it. You may also look less risky if you have a full-time job or are willing to mortgage your home.
Direct Public Offering (DPO)
This is similar to selling stocks on the stock market but cuts out the middlemen. The issuer calls the shots without the usual restrictions involved with investment banks, and like crowdfunding, it requires a large pool of interested parties. Similar to bootstrapping, investors can include friends, family, employees, and other businesses.
These methods may work to one degree or another early on, but they can fall short of raising the large figures that a business like a tech start-up requires. At the end of the day, a business that cannot raise capital will struggle to grow.
Enter the Venture Capitalist
Since a business without capital will have difficulty growing, a venture capitalist like Carter Reum will often get involved while the company is in its earliest stages. Sometimes this is before there’s even a product or revenue.
Instead of the strength of a business’s revenue, Carter Reum and other venture capitalists look for businesses experiencing rapid sales growth with high growth potential. The likelihood to dominate in an emerging market, preferably with proprietary new tech, is another characteristic venture capitalists attract. Good founders and a competent management team is a must.
Lastly, venture capitalists also look for companies that expect to be sold within the next few years or go public with an IPO. This long-haul strategy allows the funder to get a large return on their investment.
How Venture Capitalists Can Help Your Business
In exchange for an infusion of funds, venture capitalists gain equity in your business. Some founders may feel hesitant about giving up some control of their business. This is understandable since founders have often put everything they have on the line to succeed. When you’re passionate about your work, it can be hard to let someone else take the wheel. Experienced venture capitalists like Carter Reum have been on that side of it.
In exchange for founders giving up some of their control through equity, the business gains:
- The rapid growth that can come with a hefty infusion of capital
- Mentoring and guidance from professionals with experience in scaling up
- Legal, tax, and staffing strategies and overcoming obstacles
- Technical expertise outside the founders’ scope
- Connections with other funders and business leaders
- Potential customer base through strategic partnerships
Risks and Rewards
It’s important to note, too, that the support received from venture capitalists comes with no risk of default on loan. Venture capitalists make money through the business’s growth, not through payments. If your business becomes wildly successful and is acquired or goes public, the venture capitalist makes a huge profit, and they move on.
If the business doesn’t succeed, the venture capitalist may use their equity to take control of the business to recoup their losses. This may be a terrifying prospect to a business’s founders. Many entrepreneurs who receive venture capital funding consider the rewards to outweigh the risks.