Everything Young Entrepreneurs Need to Know About Venture Capital
Throughout your career as a young entrepreneur, you’ve likely come across the term “venture capital” once or twice. You know it’s important. You’re almost certain you need some. But what is it, exactly? And how can you get the venture capital you need to launch your small business?
FIRST THINGS FIRST
What is venture capital, or VC? Investopedia defines VC as, “a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.” But what does that mean?
In non-business vernacular, venture capital means money that’s given to startups to help get their businesses up and running. The investors believe in the value of your company and think it’s a good investment. They strongly believe that in the long term, your company will make them more money than they’ve invested.
By giving you money to help cover your startup costs, investors are buying a share, or “equity” in your company. This means they get a share of the profits — once you start making profits.
DO YOU NEED VENTURE CAPITAL?
In a word: maybe.
Whether or not you need investors in your startup depends on what your startup is. For young entrepreneurs building a virtual tutoring service, you may not have a lot of startup costs. If you have access to your own computer at home and dependable WiFi, you probably don’t need much else to get up and running.
However, if you plan on making a product and you need to buy tools and materials, as well as pay for shipping costs, you could need some startup money.
The only way to know whether you need venture capital investments is to make a business plan and have an honest conversation with yourself. Tools like this one can help you focus on the areas of startups costs you may not have realized on your own.
SO, HOW DO YOU GET SOME VENTURE CAPITAL?
Let’s say you’ve made your business plan, crunched the numbers, and have come up with the amount of money you need to get up and running. And let’s say that you’ve saved up quite a lot of cash over the years, but you now realize it’s not going to be enough to self-fund your startup. You need venture capital!
For young entrepreneurs, crowdfunding is usually the best way to raise the capital they need. Crowdfunding allows virtually anyone to invest in your idea. Your friends can donate just a little bit. Your family can help. Even strangers can offer you little bits of money! And all those little bits add up.
The best part about crowdfunding is that it’s easy to set up. No schmoozing investors at a networking event, no presentations in a conference room full of people wearing suits. Just set up your campaign and go.
But just like major venture capital firms, which we’ll talk about below, even your friends and family expect a return on their investments. The major crowdfunding sites offer two types of returns: equity and rewards. Equity, as defined above, means the investors get a stake in your company, which means you share the profits. These crowdfunds generally attract bigger donations. Reward-based crowdfunding means you offer a small, usually one-time reward to your investors, such as a thank-you on your company’s website or a free item from your shop.
Some crowdfunding sites to consider include:
- Kickstarter: reward-based, takes 5% of total funds raised
- GoFundMe: reward-based, no fees
- iFundWomen (for women-run startups only): reward-based, takes 5% of total funds raised
- WeFunder: equity-based, takes 7.5% of total funds raised
VENTURE CAPITAL FIRMS
For student entrepreneurs, crowdfunding is generally the best way to raise startup money. But it’s not the only way.
What do Spotify, DropBox, Zoom, and Facebook have in common? They were all funded by professional venture capitalists.
There are businesses out there whose sole purpose is to fund startups. Sounds amazing, right?
The way VC firms work is that they have a team of partners. Those partners already have money. The VC firms take pitches from young entrepreneurs and decide which ones have the most promise for the future. They then invest in the startup in exchange for what’s known as a “minority stake” in the company. A minority stake means they own less than 50% of your company. That means you still own most of your company, but you give some of the profits – less than half – back to your investors.
Most venture capital firms own minority stakes in more than one company, which is called a portfolio. They’ve invested in and usually specialize in one or a few areas of interest.
- Digital Media
And many more. Sites like Crunchbase offer ways to search for VC firms that might be a good match for you and your startup.
THE BOTTOM LINE
There’s never been a better time to be a young entrepreneur with a great idea! Sites like GoFundMe and Kickstarter, as well as VC firms, exist because the world needs more awesome inventions and services. Air B&B has completely changed the way people think about travel, and it all started with venture capital. So many people around the world, including people you know and love, want to see your good idea come to life and are willing to offer money to get started.
Young entrepreneurs like you are doing fantastic things with your creativity and energy. Your ideas are driving the world and shaping the future. That’s why it’s important to understand what venture capital is, how it’s used, and where to get it. You never know who will be the next Zhang Yiming – with the right funding, it could be you!
The Kantner Foundation awards college scholarships to young entrepreneurs in Florida. Click here to learn more and apply.