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Monday, January 17, 2011

How to Play Safe With Venture Capital

Venture capital needs to be closely watched at all stages of operation. It’s supposed to be self-supporting, and its effectiveness or otherwise is a good measure of how the venture is doing. A lot of people take out fast loans to get a venture moving quickly, and it’s a good idea to use these loans wisely. Venture capital can make a lot of money in a hurry, used properly, but it can create long term problems if you’re not careful.

Venture capital basics
The strictly correct way of managing venture capital is on a business plan basis. Venture capital management is supposed to be structured, with the money organised to cover all contingencies, operational issues, and with some reserve to back up the venture.
The fundamental issues with venture capital are:
  • Set-up costs- Assets, etc.
  • Operational/Admin costs
  • Materials, travel, promotion, etc.
  • Cost of sales relative to profit
  • Loan interest costs
  • Overheads
  • Capital reserve
Anyone who’s ever run a business will tell you that trying to operate a new venture in a vacuum, with few sales and escalating costs, is not where you want to be. It’s possible to avoid these situations, with some forward planning and good capital management principles.
Venture capital “safe mode”
You need some working principles for your venture:
  1. Make sure you can walk away solvent from any level of commitment of finances. Do a thorough, honest, risk management evaluation before you agree to get out of bed. Get enthusiastic after you’ve done the costing, not before.
  2. Make it a policy never to commit to ongoing costs. These are the costs which routinely send people broke. You need to be able to make the call when put an end to losses, not sign up to make more of them.
  1. Do not tolerate any level of ambiguity about your expenses. A good supplier or service provider gives a hard number, not a guesstimate. The usual story is that a few extra hundred bucks here and there miraculously appears on your costs. Take your business elsewhere, preferably before you need to pay for anything.
  1. Check your promotional options. There’s always a right way and a wrong way to market a new venture. Do some market testing before committing capital. Make sure you’re in contact with your core market before spending any real money.
  1. Check your competition. This is a basic and usually fatal mistake for new ventures. The number of people that start small businesses and find themselves in competition with major corporations and established local businesses is ridiculous. Be realistic about your competitiveness at all times.
Manage your money, or it will manage you:
If your venture is breaking even and justifying some confidence in further development, you may find your cash-flow situation looking slightly threadbare. Do not over-commit to borrowing. Stick to staying solvent. Small cash loans can cover trivial short term issues, but never get into a situation where you’re at actual financial risk.
Venture capital management is really a matter of good business sense. Support success, don’t chase failure. The rest is simple.

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