Venture capital is basically an additional form of private equity funding which is offered by venture capital funds or venture capital firms to emerging businesses, early stage, and high growth companies who have been deemed to have great growth potential. Venture capital funds offer a range of options for raising capital from wealthy individuals or companies. A private company’s ability to profit from their business depends largely on the amount of venture capital they can raise. The larger the amount of venture capital raised, the higher the potential the company has of profiting from venture capital. The most common types of venture capital raised are through sales of stock in a company, debentures, debt, or other assets. These various forms of capital have different objectives and ways of leveraging the available resources to fund the acquisition of a company, the growth of a company, or the expansion of a company.
One of the main goals of venture capital funding is to increase the value of the partners’ equity which then increases the net worth of the partnership. Typically venture capital investments are made by private individual investors. In some cases venture capital investment banks act as co-venturers or allow other investment banks to participate in the partnership. Many times venture capital companies will purchase a controlling interest in a start up company. This allows investors the opportunity to control a majority of the equity in the company.
One of the methods that venture capital firms use is to invest in early stage, growth companies. In some cases venture capital investors will acquire shares directly or indirectly through limited partnerships. Investors in early stage, growth companies may be eligible to receive a discounted portion of the equity in the company. There are also some venture capital firms who specialize in sole venture investments, i.e., they only make investments in startups with other accredited investors.
While venture capitalists generally enjoy excellent relationships with successful businesses, there are some investors who do not have as much luck. Usually these types of investors prefer to invest in businesses that are considered high risk. The risks inherent in these types of business ventures include, but are not limited to: limited assets, small start up costs, high start up costs, long term development costs, limited sales volume, unproven products or services, poor returns, limited opportunities for dividends, unfavorable market conditions, etc. A few venture capitalists believe that most of these risks can be effectively evaluated by the experienced entrepreneurs and there is some risk in new businesses, but they are outweighed by the advantages, such as, high chances of success due to good timing, opportunity for high profits, low risk on capital and credit risk.
Investors in venture capital funding can be classified as long term investors, medium term investors and short term investors. Most of these firms focus only on later stage companies. This is because in the past, when businesses were new, they often had less capital available. However, with today’s more sophisticated tools and strategies, it has become much easier for the early stage businesses to get the money they need. Venture capital firms are also very good at finding companies that are undervalued.
Venture Capital firms also provide a very valuable service in terms of providing seed financing to emerging companies. This helps to protect and grow the capital of the investors. Venture Capital is a very important aspect of growing and expanding a company’s business model.