Define and describe the venture capital myths discussed in the text.

Question

What will be an ideal response?

Answer 1

ANSWER: MYTH 1: VENTURE CAPITAL FIRMS WANT TO OWN CONTROL OF YOUR COMPANY AND TELL YOU HOW TO RUN THE BUSINESS: No venture capital firm intentionally sets out to own control of a small business. Venture capitalists (VCs) have no desire to run the business. They do not want to tell entrepreneurs how to make day-to-day decisions and have the owner report to them daily. They want the entrepreneur and the management team to run the company profitably. They do want to be consulted on any major decision, but they want no say in daily business operations.

MYTH 2: VENTURE CAPITALISTS ARE SATISFIED WITH A REASONABLE RETURN ON INVESTMENTS: VCs expect very high, exorbitant, unreasonable returns. They can obtain reasonable returns from hundreds of publicly traded companies. They can obtain reasonable returns from many types of investments that do not have the degree of risk involved in financing a small business. Because every venture capital investment involves a high degree of risk, it must have a correspondingly high return on investment.

MYTH 3: VENTURE CAPITALISTS ARE QUICK TO INVEST: It takes a long time to raise venture capital. On the average, it will take six to eight weeks from the initial contact to raise venture capital. If the entrepreneur has a well-prepared business plan, the investor will be able to raise money in that time frame. A VC will see from 50 to 100 proposals a month; of that number, 10 will be of some interest. Of those, two or three will receive a fair amount of analysis, negotiation, and investigation. Of the two or three, just one may be funded. This funneling process of selecting 1 out of a 100 takes a great deal of time. Once the venture capitalist has found that one, he or she will spend a significant amount of time investigating possible outcomes before funding it.

MYTH 4: VENTURE CAPITALISTS ARE INTERESTED IN BACKING NEW IDEAS OR HIGH-TECHNOLOGY INVENTIONS—MANAGEMENT IS A SECONDARY CONSIDERATION: "Execution" is the operative word in the VC world. So, VCs back only good management. If an entrepreneur has a bright idea but a poor managerial background and no experience in the industry, the individual should try to find someone in the industry to bring onto the team. The VC will have a hard time believing that an entrepreneur with no experience in that industry and no managerial ability in his or her background can follow through on a business plan. A good idea is important, but a good management team is even more important.

MYTH 5: VENTURE CAPITALISTS NEED ONLY BASIC SUMMARY INFORMATION BEFORE THEY MAKE AN INVESTMENT: A detailed and well-organized business plan is the only way to gain a venture capital investor's attention and obtain funding. Every VC, before becoming involved, wants the entrepreneur to have thought out the entire business plan and to have written it down in detail.