Read the history of almost any tech firm in the Silicon Valley today, and most likely you will see the same two words: Venture Capital.

Investment venture capital has allowed thousands of small businesses with little more than a big idea to become billion dollar giants that have revolutionized their industries. Think of Google or Apple, two of the most successful technological companies in the world. Neither would have made it past their first few years without an investment venture capital firm that was willing to take a chance on their founders.

Venture capital has a long history, though it has become increasingly prominent in the past few decades. For those with big ideas, investment venture capital can help to make them into a reality.

Investment Venture Capital: As Old as Money

While modern investment venture capital has been around for less than a century, the idea goes back to times long before. One may think back to their history lessons and the stories of governments and businesses that funded entrepreneurs in the 16th and 17th centuries looking to explore distant lands or establish trade routes. These investors would provide them with money to buy ships and supplies, as well as hire crews, with the hope of a large return when the ship returned laden with valuable goods. Christopher Columbus was an “entrepreneur” that was funded with venture capital from Spain.  However, this was a very risky investment since ships were often lost at sea due to storms, pirates or other reasons.

Today’s Investment Banking Venture Capital Firms

Modern investment banking venture capital firms have been in existence since around the middle of the twentieth century. Prior to this point, venture capital investing was generally restricted to private banking. Wealthy individuals and families would make investments in small companies with the expectation of large returns when the company took off. After World War II, investment banking venture capital firms began to be formally founded.

The first ones were created to invest in companies created by soldiers returning from Europe and Asia, and they were instrumental to some of the biggest corporate successes of the century. These include Technicolor, Digital Equipment Corporation and Florida Foods Corporation, which eventually became Minute Maid. Investment venture capital firms became more plentiful through the rest of the century, up through to the venture capital boom of the late 1990s. The Internet Bubble was partially created by the influx of venture capital firms seeking to cash in on start-ups with web-based applications and ideas. This may be known as the heyday of venture capitalism, as many investment firms were hit hard along with the rest of the tech industry when the ‘Internet Bubble’ burst.

How Investment Venture Capital Works

Investment venture capital firms are founded in order to provide a high rate of return to their investors. The governing philosophy is that they invest in a wide range of start-ups that require a relatively small investment.  Generally, venture capital firms expect that most of these companies will fail, and they will not be able to regain their full investment, if any at all.  However, the hope is that a few companies will become huge successes and give a very high return on the venture capital firm’s investment. Investment venture capital firms have become an integral part of the modern economy, allowing struggling companies to raise capital and maybe even become the next success story.

Business debt for a variety of reasons is a necessity. The majority of startup businesses for instance will take a loan out to help them in the short term of their business initiation. This investment is then used to purchase stock, manage overheads and of course, to settle any startup costs. Business loans are quite often a long term liability, so in terms of paying it back; this is a long term debt that the business will for quite a while be tied to. Slightly shorter term debt include that of taking a line of credit or even using a business credit card to pay for your short term expenditure.

In terms of looking at your liability for these debts, for instance as a business or as an individual, we must look at how your business functions and what type of legal entity it is. We will look at the two of the main types of business entity and summarise how their debts are allocated in terms of liability.

Sole Proprietorships

This is the simplest form of a business entity but also shares arguably the highest risk in terms of liability. As you may be aware, a sole proprietorship is not a separate legal entity and any debt is secured by personal liability, i.e. you as the business owner. Therefore, all profit and losses that a business accrues are exclusively held by the business owner. With that in mind, any such debt is the responsibility of the business owner to ensure is paid. Failure to do this will ultimately result in your personal assets being implicated and potentially taken as payment for your businesses debt.

Limited Company / Limited Liability Company (Ltd or LLC)

The major difference here is the company is a completely separate entity from a sole proprietorship. The company is a legally separate entity and therefore eliminates most personal liability for any debts that are owed by the business. There are two situations that are worth mentioning that could mean you are personally responsible for the debts owed by the company and they are; 1) you guaranteed the debt or personally guaranteed that any debt the company accrued would be covered by you personally. 2) That your creditors (those who you owe money to) can prove that your business was trading as a sole proprietorship and therefore there was not a separate legal entity. The second is fairly rare and as long as you are using separate bank accounts and ensuring all transactions/operations are within the limited company and not you personally, it can be avoided fairly easily.

Now that you are aware of your liability, if you should run into debt it is important to manage it and not allow it to get out of hand, whether you are a sole proprietorship or a limited company it makes little difference, a debt is a debt. There are a number of business debt consolidation organisations who specialise in helping you get out of debt so don’t be afraid to stop in for some free advice from time to time should you find your business debt is spiralling out of control. All debt can be managed, if managed correctly and not avoided that is.

How important is maintaining up to date records?

Extremely! In order to comply with the legislation laid out by HMRC (for the UK) and the IRS (in the US) businesses must keep regular and accurate business records. Complying with the law aside, how do you intend on keeping account of how much money you are making without proper accounting methods in place? It’s a no brainer that regular accounting is a must for ALL business owners.

Do I need an accountant or can I do it myself?

It’s quite rare for an entrepreneur to have an accounting or finance background at their disposal but for those that do, lucky you, the chances are you’re going to save a great deal of money! - For those of us who haven’t the matter of bookkeeping and maintaining accounts is a serious one that will need adequate provisions planned.

Do I need an accountant straight away?

This depends entirely on your circumstances and the industry your business operates in. Certainly if you have some important decisions to make with regard to the structure and tax operation efficiency it wouldn’t do any harm at all to seek professional advice in the form of an accountant or legal advisor. As an entrepreneur myself I went a long time without an accountant and therefore saved myself hundreds of pounds in fees because of it. That isn’t to say that you will be the same, it depends entirely on your circumstances but the fact is you don’t always need an accountant straight away.

Well, before you even consider looking for an angel investor you should have exhausted all other routes for startup finance. As I have said before but will say again, your family and friends can be a great starting point for startup finance, not only from a cost effective point of view but they will usually give you one of the best market rates available. (i.e. incomparable to regular high street lenders).

The first route I would always advocate for external investment from a business angel is contacting one of the many business angel networks that operate across the UK and overseas. The British Business Angel Association (BBAA) matches investors and companies from across the country. There are several other examples, Envestors.co.uk and AngelsDen.com to name just two. These angel investors are part of a syndicate of wealthy businessman and women who provide competitive funding for small business investments for up to £2 million.

The process of securing investment is relatively straightforward but depending on how you and your business perform, that may not be entirely true. You must plan and detail your business plan (thoroughly), then send in a preview of your opportunity for the investors to consider. If the angel investor requests for more details then you would normally turn up for an interview and a formal meeting. It is usually the “getting through the door” stage that most small businesses struggle with since angel investors have no shortage of applications for funding each and every week. Think yourself lucky for even getting a response from them!

The most important thing to get right before you even consider going to an angel investor is your business plan. The business plan has to be squeaky clean and secure enough to withstand a barrage of questions and queries from your potential investors. If you have seen the BBC television series Dragons Den, you will know exactly what I am referring to when it comes to having a solid business plan. You need to know your business inside out and have all the important figures to hand at a moment’s notice.

You should be prepared to have your business and personal life questioned inside out by an angel investor. I mention this as for some reason some small business owners walk into an investor and feel these questions are inappropriate or aren’t worthy of a proper answer. You have to remember that the investor isn’t just funding your business, they are funding the people behind the business too. Try and put yourself in their shoes before refusing to answer their questions. Refusal to answer will often lead to your funding application being tossed out straight away. They will want to nail down to who exactly is going to be running the business, how they are going to run it, and what your projections are for success and expansion. This should all be in your business plan, but if it isn’t, make sure it is come interview time.

The above isn’t an exhaustive list and certainly aren’t the only things that should be top of your list when you are trying to secure business angel investment but they are a start. Remember, the business plan is key.

Business angel investors are usually extremely wealthy individuals who invest in new startup businesses or companies looking to expand in return for equity in the business. Business angels quite often operate on their own, but also occasionally work in large conglomerates or an investment syndicate to either share the risk of investment or to combine funds for a large scale investment.

Who are business angel investors?

Most typically, business angels have already made their money through their own business ventures and are now looking for opportunities to invest in other businesses to get a return on their own capital. Statistics say that most business angels are men and aged between 40 and 60. With the expansion of the technology industry, specifically the Internet, those statistics are without doubt subject to change. Surprising enough, 40% of all business angel investments are lost due to business failure. Therefore it isn’t uncommon to see many venture investors sharing the risk with other angel investors rather than chasing high returns which, statistically have depleted chances of coming to fruition.

What can they offer small business startups?

Venture investors can usually provide an instant injection of capital for a small business startup. Business angels are an obvious alternative to bank loans or friend/family investment. They are most commonly associated with being a source of equity finance, in other words they retain a stake in your business in exchange for the capital injection.

How much finance do venture investors typically offer?

The amount that business angel investors invest in your business will of course differ depending on your situation. No two situations are the same in the business angel game. Typically, investments ranging from £10k to £250k are most common. Quite often as previously discussed, the higher the investment, usually the more investors that are involved in the funding of the deal. Larger investments (£100k plus) typically take place through syndicates.

What else are business angel investors useful for?

It should be stressed that business angels aren’t just cash injection providers, they can usually offer unrivalled business experience or provide lucrative contacts within specific industries that can either expedite product/brand development or bypass various channels. (I.e. expedite market entry, provide direct access to suppliers/brands etc).

In part two of this article, we will look at how you can find business angel investors and how to secure a deal with them - Don’t miss it! [Part Two is now available. Follow straight on from this article here: Finding Business Angel Investors for Startup Business Finance.]

So you’ve finally decided to do it — you’re going to start your own small business and see where you can go with it. But the problem right now is securing reliable startup funding. You need money to buy or rent the property, purchase enough inventory for you to start off, pay the bills, and hire employees. In general, to do all this you will need some form of loan, because the first few months are the most expensive — you’re just breaking into the industry, so you make very little profit with very large expenses until you figure out the exact plan of action.

To acquire startup loans and venture funding, you need to have investors and support. Startup funding is not easy to get. Many small business owners get their first startup loan from their family or friends, and this is great because you know you can trust them. However, you want to be careful when borrowing from people who are close to you because you are mixing up your personal life and your business life, and if something goes financially wrong, then that may pour into your personal life and cause all sorts of problems and feuds. Also, they are most likely not as well-connected with as many contacts as venture firms that will give you venture funding, and they aren’t considered accredited investors. You are regulated much less if your shareholders are entirely accredited investors.

You can also pay for your startup funding by getting yourself a job and being a consultant. If you start as a consultant company, you can eventually build your way into becoming a company that sells products independently. This method is much less risky because you are still going to make money consulting; it just takes time before your company will become independent. However, this way you can avoid taking out too many startup loans, which can potentially cause problems if your business fails to make much profit; if you have a family, this method may be for you.

Another way to get venture funding is to find a business angel. What in the world is a business angel? An individual who is very wealthy is called an angel because they can provide you with secure funding for your startup business in return for an investment stake. Angels are usually well connected people and can find you clients and contacts and customers, and even other investors to help with your startup funding, if your business prospects look hopeful. Business Angels are also accredited investors, so you can avoid all the legal stuff later on by starting with these accredited investors.

Now, to get funding (or retain funding), you’re going to need an exit strategy. That is, you either need to go public, or sell the company. Why do investors look for an exit strategy? Well, since they’re investing in you, they need their money back sometime, and if you have no exit strategy, you will simply be a monetary drain to them and they won’t want to invest in you or your small business venture. Thus, be sure that you have outlined your exit strategy before applying for startup loans or venture funding.

In this day and age, it’s quite a challenge to start a new small business. There are so many large companies now that many business owners can easily be run out of business by the big overbearing companies around them, and budding enterprises often never get off their feet. Take Wal-mart, for instance. Wal-mart has removed it’s competition in many cities around the United States and the rest of the world because they have, quite simply, bullied other companies out of business. Because it is a large corporation, it’s cost effective to buy in large quantities and enable them to push prices lower and suffer losses for a time until it’s competition has sailed ship. The corporation then raises its prices once the other small businesses in the town are gone and put out of business, essentially creating a monopoly market. If you are trying to start your own small business, you need to be on the lookout for these types of cases. If you’re trying to get a convenience store or something like that off the ground, beware of Wal-marts that will try to push you out of business.

The first step to starting a small business is to get a startup loan so that you can provide funding for all the things you need to do, such as paying for the property and equipment, buying inventory and hiring employees. The first few months tend to be the most risky and you will likely make very little profits while your expenses will be through the roof, since you’re just starting up and need to stock up on inventory and likely haven’t quite figured out the market yet. Thus, taking out a startup loan will help you get through these few months.

How do you qualify for a start up loan? In general, it will depend on your credit history, which will likely determine both how high your interest rate is and how much of a startup loan you’ll receive. Also, the amount of loans that you receive will depend on what kind of business you’re running and what your business plan is. If the bank sees that your business has plenty of scope and inspiration and is most likely to succeed, then it will invest plenty of startup finance into your business by giving you loans. On the other hand, if it seems like you really don’t know where your business is going or you have a lot of competition in the area where you’re starting it, the bank is probably less likely to give out a loan because it does not want to lose the money.

Thus, it’s very necessary to have a great business plan; if needed, even hire a professional to help you write and work on it. You need to be very detailed and very specific; talk about where your startup funding will be used and what percent of it will go to each aspect; discuss how your business will benefit the community. This way, you’ll be almost guaranteed to get your start up loan.

Startup Grants & Sources of Finance for Small Businesses in America

In the United States, many different federal grants exist to help during your small business startup phase. The Small Business Administration (SBA) is an excellent place to begin your research. Depending upon the industry you are in, or the type of personal background you have, you may qualify for no-interest grants or very low-interest loans. America was built on entrepreneurs, and the SBA continues to support them.
If you’re a woman, or any other minority, you can also access certain grants specific to your demographic that others may not be eligible for. Searching for these grants is not unlike searching for college scholarships, in that many are offered by different groups and associations that cater to individuals like them – women’s organizations lend money to woman, and so on. For example, womenwork.org can offer several grant opportunities for woman launching a small business startup. Similarly, if you are an African-American or other minority looking to launch your own enterprise, you may want to consult the grant opportunities listed at government grants for minorities.

Startup Grants & Sources of Finance for Small Businesses in the UK

The United Kingdom is one of the best places in the world to launch and grow a small business startup. Most small business startups are eligible for many various grants at any given time, though it may not seem that way when you first begin searching. In the UK, you can apply for a direct grant, which is paid to you in cash, and may be used for things like hiring and training employees, or for capital to invest in business projects.

Another option is the repayable grant, which is just what it sounds like, though it’s intended that the grant be repaid with business profits. In the event that the endeavour the grant funded doesn’t succeed, the grant does not have to be repaid.

A third possibility is a soft loan, which in essence is a loan in which the terms of paying the loan back are more lenient than would be the case with a typical commercial loan.

The UK National Government issues many of all three of the above types of loans; in fact, the number of national agencies that award these loans throughout the UK is more than 100. The European Commission may also be a reliable source for finding funds all throughout the continent.

Starting your small business is an exciting venture – and when you find the right sources of startup finance, you give your enterprise the opportunity to flourish to its fullest potential.