Venture Companies

A venture company is a company that:

• has a new product, technology or service that will have a big impact on the world,
• needs to raise equity funds to meet its goal, and
• has an exit strategy that will provide an exceptionally high rate of return to its investors.

The opposite of a venture company is a single-owner company. A single-owner company usually has ONE owner (or group of owners) and does not plan to raise capital from additional investors. Over the last six years, EFA has worked with both types of companies and now understand how different these two types of organizations are in almost everything they do. Below are a few of the major areas of difference.

The most important difference between these two types of companies is the size of their idea. Every business revolves around the founder’s unique product or service. Even if someone starts a business that isn’t very unique, say an auto repair business, they will likely have some unique way that they plan to deliver their service. Venture company ideas are always bigger, sometimes world changing.

Because of these big ideas, venture companies need capital relative to their idea. The bigger the idea, the more capital. There also seems to be an inverse relationship between the founder’s idea and the founder’s financial resources. Maybe that’s because venture company entrepreneurs are often more interested in building things than making money. They are in it for the hunt, more than the food.

The need to raise capital from outside investors separates a venture company from a single-owner company. These outside investors include friends and family, angel investors, strategic partners, private equity funds and venture capital firms.

In order to provide an extraordinary return to those outside investors, a venture company must plan for an exit strategy (also called a liquidation event) in the not-so-distant future, say 7-10 years. Most single-owner companies earn a return on investment through cash flow or by selling the organization; however, since their risk is lower, the expected return is lower too.