Venture capital is ‘patient money,’ but there is no free lunch

J.D. Colbert

Contributed by J.D. COLBERT

Venture capital is oftentimes a very important component of financing for business entrepreneurs to either start or to expand their business. Unlike debt which requires periodic payments of principal and interest, venture capital is “patient money.” The venture capitalist essentially becomes a stockholder in the companies in which they invest. As such, they only receive a return on their money only after any debt obligations have been retired. Frequently this means that the venture capitalist will only get paid if and when the company might be sold to investors.

Venture capital, being patient money, may sound appealing to the business owner but it is both hard to find and frequently comes at a high price. In many cases the high price isn’t just a matter of finances but has more to do with control of the company. Since the venture capitalist becomes stock owners in the companies in which they invest, they also expect to have a large degree of input into various decisions that affect the running of the company. As a business owner, you should first ask yourself whether you are willing to give up a large degree of control over your company in return for the invested funds.

Also, you should be aware that venture capitalists are very picky about the types of companies that they are looking to place investments. Typically, each venture capital company develops a specialty within a given industry, such as, for example, bioscience. Thus, if your company isn’t in that particular industry, it is not likely that a venture capital firm will consider an investment. You should thus look for a venture capital company that may specialize in your particular industry.

In addition, venture capital firms develop strong preference for investing in a given company depending upon the life cycle stage of the company. Many venture capital firms will avoid making an investment in any startup company. They consider such start up companies to be far too risky. They frequently will want the company to have been in business a certain amount of years. Furthermore, most venture capital companies will expect the applicant firm to have achieved a certain level of sales volume before they will consider an investment.

Finally, most venture capital companies will be looking to define an “exit strategy” before they make their investment. Most often, such an exit strategy may mean taking the company public or otherwise selling the company to other investors or another much larger company in the same line of business. Thus, if you should be considering approaching a venture capital company for funding you should realize that they will generally be agitating to sell your company at the first good opportunity.

There are a number of sources to look for venture capital companies. The National Association of Small Business Investment Companies (www.nasbic.org) is a good source for SBA licensed Small Business Investment Companies. A good local source in Oklahoma is the Oklahoma Venture Forum (www.ovf.org). They have a great website full of useful information. In addition, the OVF holds monthly luncheons on the second Wednesday of every month September-June here in Oklahoma City. The OVF usually lets selected companies “make their pitch” to the venture capitalists at these monthly meetings.

J.D. Colbert serves as Executive Vice President, Native American Services at Bank2. Bank2 is a growing $80 million full service financial institution with its headquarters in Oklahoma City, OK. Bank2 is owned and operated by the Chickasaw Nation. It’s About Money, is published monthly by Bank2, as a financial service to members of the Chickasaw Nation.