Venture capital is often referred to as an informal kind of equity capital. In contrast to equity capital, venture capital is paid only when the company makes a profit. Venture capital is paid through a third party, generally a venture capital firm, who buys a stake of the company’s stock or shares. This allows the venture capital firm to own a stake in the company while providing partial return to the investors. Venture capitalists typically have a great deal of experience in the business world and are capable of assessing the worth of a given business.
Venture capital funds are typically offered to private equity or accredited investors. Venture capital funds provide seed money for growing companies with high business potential and a history of success. They also provide investments for newer businesses that are considered to be in early stages, or have shown little evidence of profitability or growth potential. Venture capitalists may be interested in these types of investments because they involve fewer risks than most other forms of small investment.
Venture capitalists find companies with high potential for growth and strong management teams appealing. Typically, these companies require a combination of highly developed technology, financial backing, and highly skilled management teams. However, it is possible for first time entrepreneurs to participate in venture capital programs. Investors involved in these programs must typically meet minimum investment requirements, have access to a qualified management team, and be able to raise a substantial amount of venture capital. An important function of venture capital programs is to help finance the cost of operations for new businesses.
Venture Capitalists can either participate in funds managed by venture capitalists or provide their own capital to startups. Participating in venture capital funds allows entrepreneurs the opportunity to tap into a ready pool of resources. Venture capitalists typically fund early-stage companies. As a result, it can take years for an emerging company to become profitable enough to make it to the next level, if it gets that far at all.
Private equity firms generally provide seed money to up-and-coming startups for approximately 90 percent of the total equity. This portion is referred to as an ” Initial Investment”. Later, the venture capitalists provide a second, third, or fourth round of funding as repayment for their initial investment. These firms may also provide milestone payments based on a percentage of the profits the firm makes during its first five years of operation. Most private equity firms will not participate in initial investment for newly launched products.
VCs can provide seed money and/or an investment during different stages of the company development cycle. The specific stage(s) a particular startup is in will dictate when investors must provide additional funds or choose to wholly exit the current position. While most traditional banks do not specifically work with startups, some are becoming more willing to do so. In addition, venture capitalists are finding newer investment banks that focus primarily on vcs and provide these firms with opportunities to obtain additional capital.