The downward trend of the economy continues. An old axiom in business says that the best time to start a business is during an economic downturn, but all indications point to the same downward trend in available venture capital.
It seems that most venture capital groups are sitting on cash, riding out the uncertainty that dominates the economy. It’s not that the money isn’t there; the groups are just unwilling to take a chance right now. Why is that?
The goal of most start-ups is to make it to initial public offering (IPO) or to be acquired by another company. The rate of failure in business start-ups is alarming. With the rise in fuel costs comes a rise in the cost of everything else, including capital equipment, labor and supplies, as well as construction and real estate. Companies that will not invest in their own business are very likely not going to acquire another company. With the high costs associated with starting a business, people are relying on initial profits fund their new business.
Unfortunately, these businesses that open on a shoestring are not surviving. Consumers simply will not spend money these days, the competition is high, and it costs too much to promote and advertise a new business.
How Venture Capital Helps Small Business Become Big Business
The influx of money in the initial phases of a start-up helps the business to acquire equipment, real estate, and anything else not associated with the day-to-day operation of the business. This type of investment helps the business to grow very quickly. Usually.
In this economy, consumer confidence is low. People are sitting on cash reserves and not buying new products… from small appliances to automobiles, they are either fixing what they have or doing without. Service industries have also taken a hit. More consumers are choosing to do it themselves rather than hiring a company.
Venture capital allows the start-up to buy the equipment and inventories necessary to grow quickly and begin making money faster than it otherwise would. It allows the new company to promote and reinvest, attract new customers and expand without spinning its wheels by making money only to immediately buy something it needs.
Helping the Economy
The importance of venture capital now is that many companies that have been successful in year past are no longer making money. They are stuck in neutral and not making any significant gains. Equipment wears out. Needed improvements to business infrastructure are constant. They need to compete in order to survive and to do that, they must improve their situation.
It’s not a trickle down or a trickle up theory; it’s a trickle out theory. The business buys equipment to make money by attracting more customers and keep people employed who build the stuff another company needs to supply the company… you get the picture.
It’s a web of economy. It’s one that needs to succeed in order for our economic system to succeed. Even the United State Government is getting involved by offering money to certain industries. Say what you will, no matter your politics, but the Federal government just became the biggest provider of venture capital in the country. Usually, venture capital groups do get some say in the decisions made by the start-ups they help finance. They get a seat on the board, they get stock in the company which gives them a say in how its run. Unfortunately, many companies in these key industries are not using this money to invest; rather, they’re using it to pay down debt.
Finding Venture Capital
Many venture capital groups exist, and are looking for ways to invest. An Internet search can provide small business owners with venture capital possibilities. Most groups will express interest in the start-up, rather than waiting, but usually, the business seeks out the capital. Most will require a presentation, including a detailed business plan. It is better in this instance to offer too much information about the business, the industry, the key players, the product, and most importantly, the pay-off to those who are investing.
Joel Weaver is the Community Manager for Geneva Roth Companies.