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<\/a>By Tom Stephenson, Managing General Partner, Verge Fund<\/p><\/div>\n
As you prepare to navigate the somewhat confusing waters of raising capital for your existing business or new idea, answer this question first:\u00a0why did you or will you start the business in the first place?\u00a0The answer to this fundamental question has a large impact on the type of capital you should pursue.<\/p>\n
Venture capitalists generally classify entrepreneurial businesses into two types:\u00a0growth businesses and lifestyle or legacy businesses.<\/p>\n
Lifestyle businesses are generally started by entrepreneurs who, not surprisingly, are interested in the lifestyle of running their own business.\u00a0This does not mean that they are lazy or unwilling to work \u2013 quite the opposite.\u00a0These entrepreneurs are hard-working and driven, but their primary goals are to be their own boss and to have control over what they do.\u00a0Lifestyle entrepreneurs closely control all aspects of their business, including finances, sales and marketing, and operations.\u00a0They tend to be focused on a local market need, and they usually do not have an exit strategy \u2013 they expect to own and run the business indefinitely.<\/p>\n
By contrast, entrepreneurs in growth businesses tend to be motivated more by a desire to get rich.\u00a0Often this means identifying a market that is national or global in scope, and which they can easily reach with limited personnel from few locations.\u00a0They do not care about control or even running the business for a long period of time \u2013 they want to build as much value as they can, and then exit the opportunity for a significant amount of money.\u00a0Many of them are so-called serial entrepreneurs who will do this again and again, turning new deals every 4-6 years.<\/p>\n
How do these approaches impact access to capital?\u00a0The primary issues are control and exit.<\/p>\n
The first thing that an entrepreneur has to learn about his or her business when taking equity money from a venture capital firm like ours is that it is no longer his or her business, it is now our<\/em> business.\u00a0For an entrepreneur who left a well-paying job for the opportunity to control his or her own destiny, this is not a good fit.\u00a0While there is nothing wrong with wanting to be your own boss, it is only a problem if you also want to use someone else\u2019s money to do it.<\/p>\n Exit can often be an even larger issue.\u00a0Venture capitalists generally make money one way:\u00a0by selling our interest in a company for much more than we paid for it.\u00a0For venture capitalists, this means making an equity investment, helping management grow and develop the company, and then selling that investment for substantially more than we paid once the company has matured.\u00a0This is not generally consistent with entrepreneurs who plan to run their companies indefinitely.\u00a0While there are mechanisms to allow investors to recoup their investments without selling the entire business, these solutions seldom produce the level of return that equity investors require.<\/p>\n So how do you determine what source of capital is best for you?\u00a0Start with self-reflection.\u00a0By understanding your personal motivations for starting and growing your entrepreneurial enterprise, you can identify the right capital partner.\u00a0If you are more interested in building a business and selling it for a lot of money \u2013 the definition of growth \u2013 then venture capital and other sources of equity financing may well be right for you.\u00a0If your goals are more personal \u2013 control, long-term employment and a legacy to pass on to your children or others \u2013 then recognize that early, and approach the right sources of capital (likely debt) that can best work with you in building a lifestyle company.<\/p>\n Each type of entrepreneurial endeavor is equally valid and each has contributed significantly to the creation of wealth and jobs in America in the last half century.\u00a0 But each creates distinct investment returns, and requires distinct capital partners to maximize the chances for success.<\/p>\n Read more about the Verge Fund<\/span><\/strong><\/a>.<\/p>\n Download 17_Determining Source of Business Capital PDF<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" This article takes a look at things to consider when trying to decide if equity investment is right for your business or idea. Continue reading