When seeking financing for your venture, it's easier to gain the confidence of potential investors if you speak, or at least understand, their language. For instance, entrepreneurs are sometimes surprised to learn that 'Venture Capital' is not a catchall phrase meaning 'funding'. In fact, it's a specific type of funding with definite terms and guidelines.

The following is a sampler of terms you may come across as you go through the funding process.

VENTURE CAPITAL
Venture capital is a process by which investors fund early stage, more risk-oriented ventures. It differs substantially from 'traditional' financing in the following ways:

- Funding provided to new or existing firms with potential for above-average growth.
- Often provided to startup and other emerging enterprises because they lack the collateral, track record, or earnings required to get a loan.
- The investment, typically requiring a high potential of return, is structured so that it can be liquidated within a three to seven year period.
- Then an initial public offering may take place, or the business merges or is sold, or other sources of capital are found.
- The entrepreneur typically relinquishes some level of ownership and control of the business.
- Venture capitalists typically expect a 20-50% annual return on their investment at the time they are bought out.
- Typical investments range from $500,000 to $5 million.
- Management experience is a major consideration in evaluating financing prospects.

 

STAGES of DEVELOPMENT of a BUSINESS

SEED CAPITAL. Source of funding for the early stages of a startup venture where the product, process, or service is in its conceptual or developmental phase.

STARTUP. From founding the business to the beginning of operations and the generation of revenue.

FIRST STAGE. Initial growth phase, funded by the initial capitalization. Management and operations are in place, and markets initially identified are being penetrated using available resources.

SECOND STAGE. The business seeks to expand its product line, expand its facilities, identify and penetrate new markets, and continue the growth phase.

THIRD STAGE. The business is established in its target markets.

MEZZANINE FINANCING. Financing provided, usually by private investors or venture capital firms, prior to a company going public, or initiating its next stage of financing.

PRIVATE PLACEMENT. An offering of debt, equity or limited partnership interests to a small number of investors (generally 35 or fewer) on a 'private' basis. Exempt from the registration requirements of the securities laws.

DILUTION. Either the percentage reduction of ownership in a company resulting from the sale of additional shares of stock, or in the difference between the price paid by investors in either a private-placement or public financing.

DUE DILIGENCE. The process of investigation by venture capital firms and other investors of a company, its business, and financial plans, prior to proceeding with an investment.

FEASIBILITY STUDY. A study that evaluates a proposed venture's potential for success.

EQUITY STAKE. An equity ownership position that is provided to a funding source as compensation, or additional compensation, for providing management consulting, financing or miscellaneous services.

SWEAT EQUITY. The value assigned to the entrepreneur's contribution or investment of time and effort in the venture.

By William F.(Bill) McCready
CEO/Founder, Venture Planning Associates, Inc.
http://www.ventureplan.com