I don’t intend to get bogged down in a financial theme with my ongoing blogs, however a discussion I had today about Coursera (a company that provides access to MOOC’s – massively open online courses) triggered a discourse about venture capitalists, so it’s on my mind and it is interesting (“Interesting to whom?” says my significant other)

What is it?

Say I have some money I want to invest.  Standard investment vehicles options include, of course, equity, fixed income, real estate, mutual funds/ETF’s,  etc.  I could also take the entrepreneur route and use my capital to fund my great idea; my venture so to speak.  Or, I can take the lazy person’s way out and back some other entrepreneur’s great venture.  This is not really less work as I would need to do due diligence  to mitigate the risk my capital was being subjected too and probably provide some sage advice and wisdom (to help ensure my capital was used wisely.)  Ultimately I would get some ownership piece  of the venture  (i.e., shares representing my % stake) or perhaps a royalty arrangement.  As the business grows and makes money and becomes more valuable I can return my capital and make a profit from either ongoing dividends (or royalties) or sale of my stake  for more than I invested.

How about an example?

First comes the idea (and of course it is someones idea and they have the desire, motivation and skills to execute it).  For example, a takeout restaurant that sells shoes on the side – combining a healthy lifestyle with good food (very trendy in today’s market) We could call it Wok with Steve.  Anyway, lease, lease hold improvements, furnishing, kitchen equipment, professional consulting (lawyers- yuk)  etc, all cost $100,000.  Based on a solid business plan (remember this is just a mythical example) positive cash flow won’t be realized for six months.  Given the first six months of operation will cost $50,000 – food stock (leveraged), salaries etc. the minimum start up is $150.000.  So our trusty entrepreneur sells the venture capitalist on his idea (using of course his fabulous business plan) and gives him 60% of the company for $150,000.  Even though our trendy entrepreneur put in no capital he gets 40% of the company for the idea and all the hard start up work.    Our fearless venture capitalist has studied the business plan and is convinced his 60% share can be sold via IPO (initial purchase offering) or back to the entrepreneur or maybe a competitor for $300,000 in 2 years.  This of course is based on the revenue projections, business growth, contained expenses and so on.  So our friendly venture capitalist makes a 50% a year return on his money, of course there is some risk (or a lot of risk).  And let’s not forget our business owner, with a stake worth $200,000 for all his hard work.

So how do I get started?

Well there is “Dragon’s Den”.  Or perhaps you can think of the next face-book or you-tube idea, the dollar figures for that kind of venture are much greater than my example – start-up challenges probably greater too.  Venture capitalist’s will salivate and line up to give you money.

Or perhaps you could be like Vancouver entrepreneur Marcus Frind who stared “Plenty of Fish” on line dating service in 2004, with no venture capital.  He just grew the business reinvesting the profits ($ten million annual profit by 2008 while working 10 hours a week).  So come 2015 and he owns the company (no venture capitalist involved) and decides to get his investment back (whatever 10 hours a week is worth).  Match.com purchases it from him for $575 million.  Not a bad return on his part for 11 years work.  I guess this might make you think about doing it without venture capital (beyond your own that is)