Types of Venture Capital
Venture capital is a specific type of private equity funding that is offered by venture capital funds or individual venture capital firms to early-stage, startup, and emerging businesses that have been proven to have high potential for growth or that have shown great success. Venture capital also tends to be very risk adverse, as there are so many unknowns with regard to the management of these companies. They have typically been able to raise less money, but at higher prices. There are also more extreme risks involved in venture capital funding, although they tend to pose a lesser impact on a company’s bottom line. These risks are generally associated with personal and investor risk factors.
Private equity investments typically have a shorter term than venture capital, as well as a lower cost. When an equity investor purchases shares in a company through a private placement, he or she generally owns a part of the company immediately. The purchaser typically takes on a significant risk since the purchasing company is not publicly traded. However, like its cousins, equity in these types of placements usually provides a high Return On Equity (ROE) – particularly for early-stage companies.
Seed Capital represents the third category of venture capital. Seed Capital funds are typically made by angel investors. These are wealthy individuals who are attracted to high-growth, high value companies. They usually invest late in the startup process in order to facilitate faster growth and/or extensive testing prior to going public. As with most other investments, seed investors bear a significant risk as well, as their stake in the company is reduced as a result of dilution.
Other forms of venture capital include Technology investment banks and venture capital databases. Investment banks generally provide support for early stage, high-end startups. Venture capital databases provide access to a diverse pool of private investors with an interest in investments in technology, life science, energy, software, and other areas. Many investors choose to participate in these investment banks’ fund management services. Investors in venture capital databases are screened to match them with suitable startup candidates.
Private Placements represent the last category of venture capital. Private placements usually occur in three basic types: angel investors, venture capitalists, and start-up companies themselves. Angel investors are professional investors who typically have a net worth of at least six figures. Most angel investors will look for high quality, start-up companies that make use of innovative technology to generate profits. Venture capitalists are individual investors who normally own shares of a business, but have the goal of helping a new company generate growth or acquire new customers. In either case, they typically have a net worth of several millions of dollars.
Venture Capital represents the ideal investment strategy for many experienced entrepreneurs, because it provides a good chance for entrepreneurs to build their wealth in ways that were unimaginable just a few years ago. Unfortunately, many new businesses fail within the first two years due to financial mismanagement. Before an entrepreneur begins any venture capital investment, it is important for him or her to consult with experienced attorneys who specialize in personal finance. These lawyers can provide advice about everything from how to obtain a patent to what tax implications are associated with certain kinds of commercial ventures. Additionally, they can help entrepreneurs avoid pitfalls such as structuring their payments to tax havens, as well as help them obtain mortgage financing, debt financing, or other types of unsecured loans.