Africa -  As SME’s are increasingly recognised as central to building functional economies, companies that offer finance options for small businesses are  just starting to grow in Africa.   But navigating your way through the formalities of  any  financing institution can be confusing, so here’s a basic look at just one financial option to guide you.

As any potential entrepreneur may know, finding capital to start a business can be both a daunting and challenging task. Therefore, the best way to go about business  is to inform yourself by exploring every possible opportunity. The trick is to know what is available to you and understand your options. This article looks specifically at venture capital, what it is and how it could help your business grow.

What is venture capital?
Venture capital is money provided by a group of investors to small businesses. It is sometimes abbreviated to VC or known as risk capital. This money is provided to entrepreneurs to help them with the start-up capital they require to finance their enterprise. It includes financial backing for advertising, research, infrastructure and products. Venture capital firms or small business investment companies offer venture capital to entrepreneurs with new small-scale businesses.

How does venture capital work?
Venture capital is a specific form of financing which does not involve loans or debt. Venture capital is viewed as an alternative form of financing from traditional banks. The money that venture capital firms or small business investment companies provide acts as a long term investment. In this way, the money is given in exchange for a share in the success of the business. This means that the venture capital is offered in return for part ownership of the new business, which usually infers that the venture capital firm will be involved in some managerial decisions. The investment company does this to ensure that the new business is nurtured. An investment company aims to increase the value of the new business and make a return on its investment.

Who is involved in venture capital?
Small business investment companies which are also known as venture capital firms usually deal with risk capital. These firms or companies manage the pooled money of other investors in a professionally-managed fund. The companies are made up of partnerships between a group of people who are  investors. This partnership may be an involvement between investors, investment banks and financial institutions that pool their investments. Different venture capital firms may take different approaches to investment. For example, some firms may focus their investments towards a specific industry or region and engage themselves in unique ways.

What do venture capital firms look for in a business?
Venture capitalists look at the potential a business has to succeed as a criteria for an investment. This is in contrast to banks, which use past performance to assess investment; a near impossibility for a business still in a start-up phase.  Venture capital firms tend to be quite selective when choosing potential investments. This means that venture capital is often focused at companies with especially strong growth potential. Venture capitalists also seek specific requirements from new businesses for their investments. Just two of these aspects include a concrete business plan and a capable managerial team.

Remember, to find the most suitable financing for your business, try to explore as many options as possible that are available. Not every finance solution is tailored to suit every small-scale business. Two organisations which are members of the African venture capitalist association include Technoserve and Oiko Credit. To check out these organisations and other financing institutions listed on the Africa Report website, go to our online business directory at http://www.africareport.com/directory/resources/