What is Venture Capital?
In venture capital, investors provide startup companies and small business that they believe have a long-term growth potential with finances. The venture capital comes from investors that are well-off, investment banks, and other financial institutions. It can be in a form of monetary, technical, or managerial expertise.
For the investors who put up the funds, it can be risky. However, the potential for above-average returns is an attractive payoff. Venture capital funding is becoming popular and is an essential source for raising capital for new companies or ventures that have a limited operating history. The downside of this is that the investor usually get equity in the company and they have a say in the company’s key decisions.
Want to find out more options for startup funding? Read: 5 Stages of Startup Funding
The Venture Capital Process
The first step for a business that is looking for venture capital is to submit a business plan to the venture capital firm. If the firm or investor becomes interested in the proposal than a thorough investigation of the company’s business model, products, management and opening history is performed.
To learn more regarding business plans you can read our detailed articles:
The background research is very important since venture capitalists tend to invest large amounts in fewer companies. Many venture capital professionals have prior investment experiences and tend to concentrate in a particular industry.
The firm or the investor pledges an investment of capital in exchange for equity in the company. The funds may be provided all together but the capital is typically provided in rounds. The firm or investor takes an active role than in the funded company and advises and monitors the progress before giving additional funds.
Planning on pitching to a VC? Read our detailed article: What is a Pitch Deck?
Stages of Venture Capital
The investors in a venture capital focus on different stages.
- Seed Stage venture investors help a company get off the ground.
- Early Stage venture investors help an already successfully proven company to accelerate their sales and marketing efforts.
- Growth Stage venture investors pour kerosene on top of a company which is already on fire (in a good way).
Venture Investor Expectations
Venture capital is the riskiest investment that an investor makes. Most venture investors are lucky because they get their original capital returned and many investments are written off in their entirety.
The odds of a company to hit a “home run” successfully is one in ten.
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