Venture capital (VC) is an investment in equity or financing for start-ups or small businesses with strong long-term growth potential. Usually, high-net-worth investors, investment banks and other financial institutions provide Venture capital. The contribution is not limited to finance participation; it can also be in the form of technical or managerial expertise.
The potential for above-average returns is an attraction for investors who take the risk of investing in a young company. Venture capital is attractive for companies that do not have access to capital markets, bank loans and other sources of finance. The quid pro quo for the investment is the ownership of shares in the company, which gives the holders decision-making power.
Often shares in companies are sold to investors through limited partnerships established by venture capitalists. The main difference between venture capital and other private equity transactions is that venture capital focuses on emerging companies seeking early-stage funding. Private equity tends to fund more established companies seeking an equity injection.
Venture capital is funding for new businesses that do not have access to the stock and banking markets. It can be a win-win situation: companies get the capital they need, and investors get equity in promising companies.
A venture capital investment has other advantages as well. In addition to investment capital, venture capital firms often provide mentoring services to help new businesses get established and provide networking services to help them find talent and advisors. A strong venture capital support can be leveraged for new investments.
On the other hand, the introduction of venture capital comes at the cost of deprivation control over business decisions. The investors take a significant share of the company's shares.
The stages of venture capital investment are :
- Pre-seed: This is the first stage of company development when founders try to turn an idea into a concrete business plan. They can enrol in a business accelerator for early funding and mentoring.
- Seed funding: This is when a new business seeks to launch its first product. Since there are no revenue gains yet, the company will need VCs to fund all its operations.
- Start-up financing: Once a company has developed a product, it will need additional capital to accelerate production and sales before it can become self-financing. The company will then need one or more rounds of financing.
For small businesses, venture capital usually comes from wealthy individuals - often called "angel investors" - and venture capital firms.
The first step for any company seeking venture capital is to present a business plan. If interested in the business, the company or investor must analyze the company's business model, products, management, operating history, etc.
Innovation and entrepreneurship are at the core of a market economy. However, new businesses are often risky and expensive ventures. Consequently, external capital is often sought to spread the risk of failure. In return for taking this risk through investment, investors in new businesses can obtain shares and voting rights. Venture capital can therefore enable start-ups to get off the ground.
New businesses often do not succeed, meaning that the early investors may lose all the money they invested. A general rule is that for every ten startups, three or four will fail. Another three or four lose money or only return the initial investment, and one or two produce substantial returns.
Depending on the company's stage, its perspectives, the amount to be invested and the relationship between the investors and the founders, VCs will typically take between 25% and 50% of the ownership of a new company.
Venture capital is a subset of private equity. In addition to venture capital, private equity also includes debt buyouts, mezzanine financing and private placements.
While VC and angel investors provide money to start-ups, venture capitalists are typically professional investors who invest in a broad portfolio of new businesses and provide practical advice and leverage their professional networks to help the new business. Angel investors, on the other hand, tend to be high net worth individuals who like to invest in new businesses more as a hobby or side project and may not provide the same expert advice. Angel investors also tend to invest first, followed by venture capital.
Venture capital is a central part of the life cycle of a new business. Before a company can begin generating revenue, it needs sufficient start-up capital to hire employees, lease facilities and start developing a product. Venture capitalists provide funds in exchange for an equity stake in a new company