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The Venture Adventure

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The Venture Adventure

In This Chapter

  • What venture capital is

  • How much equity in a company to give up to get venture capital

  • What the different types of venture capital are

  • How to find venture capital companies

Venture Capital

What is venture capital? (Those of you who know are already salivating like Pavlov's slobbering dog at the mere sound of those two magical words.) Venture capital is when somebody gives you money to develop your company in exchange for an investment in your company.

Typically, you will need venture capital because you have no way to borrow enough money for your business through normal channels, such as from your friendly neighborhood Savings and Loan. In fact, if you go down to your favorite bank with your hand held out, you'll probably hear the words "high risk" a lot. Internet startups are often described as being high-risk investments. Success, remember, is never guaranteed for any Internet startup.

Yet, appropriate Internet startups do receive venture capital from investors. Commonly, the person or corporation who invests in your startup will receive stock in your corporation. But getting an actual loan from a venture capitalist isn't totally out of the picture.

In these days of incubators (companies that mix guidance with venture capital), you will find that venture capitalists might try to reduce their possible risk by having someone of their choice on your management team. Having a proven management team is one of the crucial elements of success for any company and is something that a venture capitalist will be very concerned about.

Do you have a startup that you intend to take public in a year or so? If so, and your startup looks promising to potential investors, you might have a suitable company to obtain significant venture capital.

P/E Isn't About Gym Clothes

A price-earning ratio is often referred to as a P/E. If you had a sudden dread of some mean coach making you duck-walk across the gym floor carrying a fat person on your back, don't panic! This is actually a way that you can calculate the value of a corporation. For example, if a company had a P/E of 10 and annual earnings of $100,000, it would have a credible value of one million dollars. Take the number of outstanding shares of stock and divide that number by the plausible value of the company and you'll come up with a probable value for the shares of stock. Easy! How is the P/E ratio established? Investment analysts determine it based on the market, how other companies similar to yours are doing, and other factors. Not all experts may agree on a P/E ratio for a particular company.

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