Who Venture Capitalists Fund: 3 Types of Target Businesses

When you own a small business or an SME (small and medium-sized enterprise), growth is often held back by a lack of capital. Banks usually do not trust SMEs enough to lend to them, because their portfolios are still thin and they have no assets to put up as collateral. There is another solution, though: attract the attention of venture capital investors, who finance the company and share the returns as agreed. Venture capital investors usually have their own criteria for the partner companies they will finance. Here are some of the targets of investors who want to put their money to work and earn a return down the road.

• Micro, Small and Medium Enterprise Owners

Starting with micro, small and medium enterprises (MSMEs), a venture capital investor can pour in funds and help those businesses grow. This is a fairly good move, since the investor does not need to put up large capital when the business is small. And by getting into MSMEs and taking part directly through equity, the investor can learn the company's situation and conditions. MSMEs are usually targeted by novice investors as a first testing ground, or to gain experience before moving into wider and larger investment areas. That is fine, because MSME owners benefit greatly from having an investor too. With the new funds, an MSME owner can grow the business, raise product quality and earn bigger profits thanks to that growth.

Read also: Cash Loan Requirements for Individuals and Businesses

• Startups

A startup is usually not yet stable but has a fairly mature business plan. Because its cash flow is not yet steady, the business still has to be propped up by other sources of funds so its programs and plan can run well. Venture capital investors look for startups with a mature business plan and the potential to bring in profit later, given that most startups today carry cutting-edge technology that solves long-standing problems in society. By helping grow the partner company, the investor also earns a return in line with the investment made.

• Companies with Attractive Business Plans

Small and large companies alike can replace or update their business plans along the way. Large companies that have stalled because the times have moved on will usually update theirs. This is where they need funding to carry out the new plan, to grow and to hold their own against newer competitors with fresher ideas. New companies with brilliant ideas also need backing from venture capital investors so their business grows quickly and becomes better known to the public.