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Beware of venture capitalists

It's not only you who should be examined in relation to someone who has the money you need to get your business started - you also need to examine anyone who wishes to invest in the company (many forget to examine investors because of pure delight that someone believes in them).

Money is good, but it's also important to find out who is behind the money and what you can expect from them. You don't want an over-controlling, cowardly and intrusive investor in your business because if you do, you will lose the desire to work.

Is venture capital for you?
If you plan to finance your business's development and growth with equity, you should plan well ahead before you get into an acute liquidity position. Otherwise, the risk is that the investor considers the investment too uncertain and simply says “no thank you”. It can also cause you to have to make a bad bargain for yourself because you have exhausted your negotiating position. An investment from venture capitalist is done in the hope that your company will provide a good return for the capital invested financier. As the name states, this is a venture capitalist willing to take a risk. It has to be balanced against the potential returns and how far away in time this return is expected to be. Risk financiers make a business analysis, a due diligence to assess the potential and value of the company. In this context, various experts are called in to assess the company's position.
  There are several ways that the financier can get their refund. It's through IPO, merger with a listed company or through acquisitions. Distribution of profits to shareholders is also a source for refund. When a risk financier assesses your business, it's done on a totally different basis than at the bank. Risk capitalists anticipates the possibility for the capital invested to be lost, unlike the bank that must have collateral for their loans. Most venture capital is private, but there are some government authorities that act as venture capitalists.

Here are the questions you should ask a venture capitalist:
• Why would you invest in this company?
• What are your resources in addition to money that can help the company move forward and how do you like us to use it?
• What part of this company do you believe in the most?
• What other types of companies have you invested in the past?
• Is it okay if I contact the other companies you invested in?
• How quickly do you expect to get a result of your investment?
• How would it affect you if you lost the money you invest now?
• If you knew that I was not capable of building this company to the level you want, what would you do?
• How and by whom do you anticipate that the decisions are made?
• What role do you have in the company?
These questions are important for you to get answers to. Sure, you need the money, but you don't need to have a headache every day if the venture capitalist is absolutely the wrong person for your company.

About the author

Stefan Ekberg has worked in marketing for small business for 20 years and has written around 30 books on how small business owners can market themselves with limited resources. . In 2012 Stefan was nominated as Entrepreneur of the Year in Stockholm.

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