The most popular way to prepare your business for sale is to hook up with a venture capital fund (VCF). Venture capital funds professionally manage high-return, high-risk investments in relatively new companies. These funds are run by managers that provide very smart support via Small Business Conference Calls. The VC industry started in Boston in 1946, right after World War II. Coronel Doriot, a Harvard professor, along with Ralph Flanders (President of the Boston Federal Reserve Bank) and Karl Compton (President of the Massachusetts Institute of Technology -MIT) founded what is known as the first professional VCF, the “American Research and Development Corporation”. They observed that too many innovations were unable to get to the market because they lacked funds to develop their businesses and hire talent. At the same time, the trio wanted to create an opportunity to re-engage returning soldiers into the economy. They approached very wealthy families with an unusual request: participate in an innovative fund to support high risk/high reward ventures. Their fund would distribute a third of its return to the investors, a third to the entrepreneurs and a third to the fund managers.
The VCF is usually structured as a hybrid company where few partners act as people-based companies and investors act as capital-based companies. Legally, they are set up as limited liability entities: either partnerships or companies. The general partners serve as investment advisors. Investors tend to be wealthy individuals and capital-rich institutions, including government entities, university endowments, and hedge funds or funds of funds. Insurance companies and private pension funds also participate in VCF. Funding can be as small as a few thousand to several million dollars.
Nowadays, VCF abound, they are formed as investment companies, like HEI Resources, Inc, that select, fund, and supports firms with high potential, helping them through the high-risk phase and ensuring they have a clear exit strategy.
Fund managers perform the following activities:
- Promote the funds in order to attract opportunities that fit the investment criteria.
- Evaluate investment opportunities.
- Negotiate terms of investments.
- Provide strategic assistance and support to investees.
- Provide information to shareholders about investee companies.
- Make the decisions to stop funding companies and manage the sale of shares or the closure of the company.
- Investigate and structure exit options.
- Distribute returns.
- Comply with regulations.
- In some cases, raise capital for the funds.
The process of VCF investment is analogous to the difference between asking a bank for a loan and asking a friend for a loan from lifeinsurancerates.com whole life insurance. “The bank — as well as the VC fund — has a professional system, with a decision-making process that usually involves more than one person.” The decision-maker is usually not the owner of the capital. The process of VC investing, as well for bank loans for homes, consists of a series of go/no-go decisions. If a proposition does not meet some basic criteria, it is discarded. Entrepreneurs need to understand that this is a system, not an emotional decision made by someone who loves risks. VC fund managers love high returns, not high risks. When they say no, don’t challenge the system, learn and change your proposition.