Venture capital firms want repeat entrepreneurs. They want plans with huge growth rates, in high-growth industries — usually high tech as well as high growth. They want excellent management teams with proven track records. And they want plans needing multiple millions of dollars, generally $4-5 million and up. There are only a few hundred true venture capital firms in the United States, probably half of them located on Sand Hill Drive in Menlo Park, CA. They invest in new businesses in exchange for substantial ownership, generally more than 50%.
This group includes thousands of individual investors, investment clubs, local investment groups, and others. They are hard to categorize and hard to describe as a group. Angel investors act a lot like venture capitalists in their dependence on business plans and management teams to evaluate businesses, and they also like high growth and high return, but they are more likely to invest smaller amounts. Angel investors will also sometimes accept less ownership than venture capitalists, in some cases as little as 5-10%. However, there are no simple guidelines or standards on this; everything depends on the specific case.
Commercial bank loans
Banks loan businesses money for working capital and even occasionally for expansion, but not without solid collateral. Banks don’t generally invest in new businesses or new business plans, for good reasons. The government doesn’t want banks taking undue risks with depositors’ money. If you don’t have solid collateral, or if you aren’t willing to risk what you have, then don’t expect to get commercial loan financing.
Small business administration guaranteed loans.
The SBA guarantees loans for small businesses in some circumstances. You still need to have 30% of whatever you need to borrow as collateral, but that’s a lot less than the normal 100%.
Friends and family
Many businesses start with financing from friends and family. This is sometimes the only way to start a business, but it is also full of potential problems. Go very slowly.
Many businesses start without loans or investment, and many more businesses do their business plans without needing outside financing. If your numbers are strong enough to go without outside money, congratulations, that’s a very good thing.
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