Types of Venture Capital
Venture capital is a type of private equity funding that is offered by venture capital companies or funds to newer, smaller, or budding companies which have been deemed to have great growth potential or that have shown high future growth potential. These companies are usually new to the market and are seeking capital investment to grow and become profitable fast. This is a vital type of financing for such companies, as there are no traditional bank loans from financial institutions available for their ventures. Venture capitalists usually provide an advance amount of money to the company so that it can accumulate enough working capital or money to make a start up business function properly and eventually grow into a successful enterprise. As you can imagine, this type of financing is very expensive in nature, as it is normally comprised of very high risk investments.
The venture capital financing typically takes two forms: angels and venture capitalists. The angel investor normally has an interest in a particular start up company that they believe will have the potential for becoming a successful company. The venture capital financing occurs when the angels participate in the funding along with the start up entrepreneurs. This is often done through the use of different types of investment firms, as most venture capitalists tend to be highly successful professional investors who have extensive experience in dealing with both startup companies and later stage well-established companies that can potentially compete with them. However, there are other ways of obtaining this financing as well.
Private equity. Similar to angel investing, venture capital investment firms provide this type of funding to entrepreneurial startups which have the potential for growth within the company itself. This differs from angel investing, as the goal of the venture capital firm is to help the company grow and ultimately provide a higher value to its investors. While this can result in lower profits for the entrepreneurs, the entrepreneur may end up providing a product or service which solves a particular problem and provides a solution for potential future problems as well. This tends to be a more riskier form of investment for the venture capitalists than angel investments because they are not as familiar with a company’s business plans and practices.
Public equity. This is another form of venture capital funding wherein the money made from such investments is made available to all common stock holders of a corporation or a private firm. Unlike angel investing, the money made from venture capital funds is not generally given to the new owners but rather to the existing shareholders. As with private equity, there are risks involved in these investments; however, there is also great potential for large returns.
Seed Capital. Seed capital is the most frequently used type of venture capital funding. In a seed capital funding, the money made from the investment is used for research and development activities necessary for the success of a company. While most venture capitalists fund early stage companies in the form of seed capital, some companies obtain seed capital later on as part of larger Series A investments.
Common equity. Endowments are a way for companies to raise small amounts of capital. The endowments can be used for several purposes depending on the specific needs of the company. In a venture capital investment, for instance, the endowments are usually used for buying certain tangible assets that the company must have in order to generate the required revenue to repay the lenders. There are also other common forms of equity, including preferred stocks, common stock, redemption rights, warrants, and debentures.