• Venture Financing For A Work From Home Startup
Posted by Tom Harnish on April 2nd, 2008
If you’re trying to find money for a home-based business, venture capital may come to mind, but a few notable garage start-ups notwithstanding, most home businesses will never find its way into a venture fund’s radar.
In general, venture capitalists are only interested in companies that offer:
Huge Market Potential
Venture funded companies are expected to be able to grow to $30, $50 or even $100 Million in five to seven years. This means that the industry has to be big enough to support such growth. But many venture proposals fail to adequately convince investors of the market potential while others naively project that they’ll capture 10%, 20% and even 50% market share in a very short period. When you’re projecting potential market share, consider the fact that with all its marketing might Apple’s personal computer market share is less than 9%.
Proprietary Products or Services
Companies with proprietary products or services often enjoy a desirable “unfair” competitive advantage by virtue of the exclusivity of their products. Patents, trademarks, copyrights, exclusive distributorships, or other special rights may protect a company’s unique position in the market. Sometimes, a non-protected product or service with an exceptional head-start on potential competition can fit this criteria, as well. The point is that the company must have some significant advantage over existing or potential competitors so it can achieve and maintain a dominant position in its industry.
Proven Management Talent
Management is the most important element in a venture capitalist’s decision to invest in your company. Are you, and the others in your company, capable of building a $50 Million business? Have you managed similar growth in the past? Do you have, or are you able to hire, the top people in your field? Venture capitalists will want to see real depth.
Extraordinary Returns
Venture capitalists are looking for returns of 35-50% per year. A 50% return means that if they invest $1 Million they want to wind up $5 Million in four years. Obviously most businesses, even the high-flyers, won’t achieve that kind of return through profits. In fact, most will lose money in the early years. Therefore, you have to be willing and able to sell the company or go public in three to seven years.
In short, and this is the naked truth, a home based business is an extremely unlikely candidate for venture funding. But times, they are a changin’, so if you have a unique software product or a web-based solution to something that frustrates millions of people, you wouldn’t be the first billionaire who can trace his beginnings to a spare bedroom.