Understanding Venture Capital
Venture capital is the first type of financing a business needs in order to get started. Venture capital is also referred to as an initial public offering, a private funding source, or an angel investor group. Venture capital is often provided by venture capital companies or groups, or both. A venture capital company is a partnership between two or more investors. This type of financing is usually used to provide early stage companies with the resources they need to get started on the market.
Typically, a venture capital company will offer funding to new companies. They do this through a process called “private placement” – essentially allowing some of the profits from the operation of the company (the “outlay”) to be put into a private equity account. The idea is that new companies will be able to repay the investors when they are ready to start making sales. This is referred to as an IPO, or initial public offering. Many IPOs are valued at over $5 per share, which can make them one of the most lucrative investment opportunities available to individual investors.
Venture capitalists are usually very wealthy individuals, some of whom have made a tremendous amount of money investing in different businesses. These investors typically prefer to fund early-stage businesses, or those that are growing at a moderate rate, rather than growing fast and taking their profits quickly. One reason that they choose these types of investments is because they do not require as much of a risk as later-stage or growing companies. Venture capital firms seek out good, solid organizations with a track record of success rather than hot companies that may just be starting out.
Another advantage to venture capital companies is the ability to provide long-term commitments to these financing arrangements. Unlike some private equity firms, VCC’s are not looking to quickly liquidate their stake of the organization. Most of the time, VCC’s will continue to hold onto a percentage of the company’s stock for many years. They also do not like to lose their investment, so they work very hard to make sure that there is not a risk of investors selling their shares before they are paid out.
As with all investments, you must be an expert on the particular industry you are working in, as well as being familiar with the types of businesses that are looking for a private equity partner. Because of this, many venture capitalists specialize in helping with specific industries. You will want to research several private equity fund managers prior to deciding which one will meet your investment goals and requirements. You should ask about the experience of the venture capitalist as well as the track record of the firm.
Venture Capitalists work with smaller businesses, which are known as angels. Smaller companies usually do not have the financing levels to support themselves and therefore are seeking outside investors to raise capital. Because of this, potential V VC partners are asked to provide a significant amount of equity as part of the deal. Therefore, you should be ready to provide a substantial amount of equity if you are serious about partnering with a V VC firm.