{"id":5548,"date":"2016-04-04T10:48:01","date_gmt":"2016-04-04T15:48:01","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/starting-a-business\/venture-capital-faq.html"},"modified":"2026-06-17T01:51:00","modified_gmt":"2026-06-17T06:51:00","slug":"venture-capital-faq","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/starting-a-business\/venture-capital-faq.html","title":{"rendered":"Venture Capital FAQ"},"content":{"rendered":"\n
\n

Venture Capital FAQ<\/h1>\n\n
\n
\n By FindLaw Staff<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
\n

Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
\n

This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
\n

The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

\n
\n
\n

Key Takeaways<\/h2>\n

A venture capitalist is an investor or investment firm that provides capital and management expertise to startup companies in exchange for an equity stake. These investors typically target early-stage, high-growth businesses, seeking high rates of return over a four-to-seven-year period rather than regular loan repayments. Beyond startup money, they actively contribute industry contacts, strategic discipline, and board-level guidance.<\/p>\n\n <\/div>\n <\/div>\n<\/div>\n\n\n

\n

If you are an entrepreneur<\/span> hoping to fund your new business<\/span> startup<\/span> with the assistance of a venture capitalist<\/span><\/a>, you’ll want to know more about the specifics. Many of us think that venture capital<\/span> funding<\/span> is tied solely to Silicon Valley and the technology sector, but venture capitalists<\/span> can be found throughout the U.S. providing seed money for numerous different types of businesses. Read on as FindLaw helps you understand venture capital<\/span> firms<\/span> and VC funding<\/span>.\u00a0<\/p>\n

Form your LLC with confidence.\u202fOur trusted partner LegalZoom has packages starting at $0 + filing fees.<\/a><\/i><\/b><\/p>\n

Q: What is a venture capitalist<\/span>?<\/h2>\n

A: <\/strong>Venture capitalists<\/span> are individuals or companies who provide investment capital and management expertise to new businesses<\/span>.\u00a0In return, they will ask for an equity position<\/a> in the company, usually in proportion to their risk and the amount of their investment.\u00a0They have a stake in your company because their future returns are tied to its performance.<\/p>\n

Q: How does a venture capitalist<\/span> get involved with my business?<\/h2>\n

A: <\/strong>Venture capitalists<\/span> effectively buy their way into the company with their investment.\u00a0That means that the company will not have to repay the capital; rather, venture capitalists<\/span> expect to take their return in capital gains<\/a>.\u00a0The company will have a sizeable amount of money to work with, while the venture capitalist<\/span> takes an active role in managing the company to ensure its success.\u00a0After all, the venture capitalist<\/span> has just bet a great deal of money that your company will be a winner.<\/p>\n

Q: What role will the venture capitalist<\/span> play?<\/h2>\n

A: <\/strong>A venture capitalist<\/span>\u2019s role is much like a partnership<\/span>.\u00a0Their active management participation may occur through membership on the board of directors<\/a>, or through input into other management decisions.\u00a0The venture capitalist<\/span>‘s goal is a high (typically a 30-40% per year) return on the investment over the period of his or her involvement, which is typically four to seven years.\u00a0This means that the company must follow a high-growth<\/span> strategy.<\/p>\n

Q: How can a venture capitalist<\/span> benefit my business?<\/h2>\n

A: <\/strong>The resources and expertise of a venture capitalist<\/span> not only bring money without the requirement of regular repayment by the company, but also provide several other less tangible benefits.\u00a0The venture capitalist<\/span> shares a common desire for success with you, and should not be thought of as a lender<\/span> from a financial institution<\/span> but more of a partner. He or she contributes expertise, experience, contacts, and discipline.\u00a0The presence of a venture capitalist<\/span> also lends credibility to the company.<\/p>\n

Q: What is a venture capitalist<\/span> looking for?<\/h2>\n

A: <\/strong>The strength of a company’s management team<\/span> can be more important to a venture capitalist<\/span> than the company’s product.\u00a0This year’s most promising product may be eclipsed by next year’s new technology, but a good management team<\/span> can foresee and work through such difficulties. A venture capitalist<\/span> wants to see a capable, committed set of managers who are adaptable and comfortable with growth and change. A venture capitalist<\/span> is always looking for a high rate of return.\u00a0The earlier your company is in its business cycle, the higher that rate will have to be to compensate the venture capitalist<\/span> for their risk.\u00a0This means that the company must be positioned for rapid growth, in terms of both management and product.<\/p>\n

A venture capitalist<\/span> also wants to see a realistic set of financial projections and requirements.\u00a0They will take a conservative view of your company’s chances for profit and success.\u00a0 It is helpful to emphasize financial requirements for this stage in your company’s growth.\u00a0 Showing a realistic reflection of the company’s financial state shows discipline and the ability to plan for the future.<\/p>\n

The owners’ commitments to the business through personal financial stakes are also key.\u00a0 A venture capitalist<\/span> will be leery of investing money in any enterprise in which the business owners<\/span> are unwilling to invest their own.\u00a0<\/p>\n

Finally, the venture capitalist<\/span> will want a clear exit strategy — how to get his or her investment and return back out of the company.\u00a0 Some preferable exits are through an IPO or the sale of the company<\/a>. However, other methods include management buyout, corporate redemption, sale of shares to principals, or sales of shares to other equity partners.<\/p>\n

Q: What should I do to find a venture capitalist<\/span>?<\/h2>\n

A: <\/strong>Before seeking a venture capitalist<\/span>, you will need to tailor your business plan<\/span><\/a> into a venture capital<\/span> plan.\u00a0 A venture capital<\/span> plan differs in the following ways:<\/p>\n

    \n
  1. \n

    It is a strategic document in that it not only sells a financial plan to investors, but the company’s vision, future goals, and potential.<\/p>\n<\/li>\n

  2. \n

    It must clearly demonstrate how the company intends to grow, allowing the venture capitalist<\/span> to exit, and what the exit strategy will be.<\/p>\n<\/li>\n

  3. \n

    It must describe exactly how much money the company wants, and what it will use it for.<\/p>\n<\/li>\n

  4. \n

    Additional detail is required because venture capital<\/span> is riskier than traditional financing.<\/p>\n<\/li>\n<\/ol>\n

    Q: How can I research a venture capitalist<\/span>?<\/h2>\n

    A: <\/strong>A venture capitalist<\/span> typically has a preferred industry, region of the country, investment size, and stage in a company’s development.\u00a0 Attorneys and accountants can often refer you to venture capitalists<\/span> they know or have worked with.\u00a0 Extensive information about individual venture capitalists<\/span> is also available online. \u00a0Once you find several candidates, it is advisable to research them thoroughly, including their past performance record and any referrals and recommendations from past clients.<\/p>\n

    Q: When should I approach a venture capitalist<\/span>?<\/h2>\n

    A: <\/strong>Properly timing your approach to a venture capitalist<\/span> is important.\u00a0 As in any type of financing<\/span>, you can get venture capital<\/span> most easily when you need it least.\u00a0 Courting a venture capitalist<\/span> takes a great deal of time and effort, so it should be done when you and other key members of the management team<\/span> do not need full attention on the company.\u00a0 Some good times to look for a venture capitalist<\/span> may be<\/p>\n