What is a Venture Company?
A venture company
- 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, I have worked with both types of companies and now understand how different these two types of organizations are in almost everything they do. I'll try to cover 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 in proportion 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.
These are just a few of the differences between a venture company and a single-owner company.
Why is Financial Management Unique in Venture Companies?
Three reasons:
1. Much of the financial management in a venture company revolves around capital - mostly equity, but sometimes convertible debt. Early on there is typically not a lot to do with income and expenses or the profit and loss statement. Because of that, entrepreneurs tend to ignore the financials until they are a year into the company and have issued multiple series of stock and stock compensation.
2. Most financial work is, or should be, done on forward-looking financial statements and financial models. The first order of business in a start-up is to create a business plan that is supported by financial projections. These are quite often revised as new information is learned or the business changes its priorities or focus. Later, forecasts are necessary to determine how much cash is needed before the next round of funding.
3. Because the company is typically growing fast and changing priorities, so too does the financial management function. It changes when employees are hired. It changes when the board of directors or shareholders needs financial statements. It changes when revenue starts occurring. All result in changes to the financial management systems.
Celebrate Technology Award Nominations
In 2009 the Celebrate Technology Awards will be presented at the Colorado Springs Regional Development Corporation's Excellence In Industry dinner on October 14th. Colorado technology professionals get together for one evening to share their stories, recognize great accomplishments, renew valuable contacts and build new relationships. The sponsorship proceeds from the event are used to fund scholarships for students at the University of Colorado at Colorado Springs and Colorado Technical University.
Seven Celebrate Technology Awards will be presented including two individual awards, Entrepreneur of the Year and Inventor of the Year and five company awards in the area of Bioscience and Biomedical, Information and Communications, Security and Defense, Energy and Environment, along with the Richard Petritz Rising Star Award
Visit the Celebrate Technology web site NOW to nominate deserving individuals or companies - www.celebratetechnology.org.
Biotechs Might Compete for Business Grants
by Amy Gillentine
July 9, 2009
Legislation passed the House of Representatives this week that will allow companies financed by venture capital to compete for Small Business Innovation Research grants.
That's welcome news for biotech companies, which usually spend decades and billions of dollars on research.
more. . .
