Venture capital is a type of private equity funding which is given by private venture capital companies or private funds to budding, emerging, or newly started companies which have been determined to have very high growth potential and/or that have proven very high success. Venture capital investments are usually made in the start-ups of companies with significant market potential, highly advanced technology and other important qualities, which may be hard to duplicate elsewhere. In some cases, venture capitalists also fund early stage companies with low cost technologies or other relatively less expensive businesses having high marketing potential. This type of funding is used for the early stage of a company’s development.
Private Venture Capital is not the same as pension funds. The venture capital companies normally invest in the beginning stages of a company’s development, not later as would be the case with pension funds. In fact, they are quite flexible about when they invest. They tend to make their investments in the start-ups of companies which show signs of promise, and in those whose management team is capable of managing the business properly and of turning it around to become a highly profitable enterprise. As with pension funds, private venture capital does not require any compulsory annual returns. However, it has been noted that certain pension funds, upon making investment returns, do tend to increase their distributions to the invested funds.
Venture capitalists generally prefer to deal with professional investment banks like Merrill Lynch, Goldman Sachs and Morgan Stanley. These investment banks handle the underwriting process and the negotiations for venture capital investments. They also make the final decisions as to where the investments will be invested.
Venture capitalists can seek funding from many sources. Angel investors are wealthy individual angels who typically provide start up capital to budding entrepreneurs with a high net worth. Typically, angel investors will need to be approached via intermediaries such as lawyers or accountants. Angel investors, in addition to seeking high net worth individuals, also prefer to invest in small businesses that show clear potential for being successful. Most angel investors do not require any sort of credit check, so it may be possible to obtain seed money for small businesses without the need for a down payment or other security financing.
Venture capitalists usually fund the start up costs of companies which are then sold to institutional and large investors. These investors usually require at least a 20% stake in the company in order to approve the sale. Several venture capital funds were recently created to cater to the needs of smaller entrepreneurs. An increasing number of venture capital funds are now being sponsored by wealthy individuals, who are using their personal wealth to back start up companies. A number of wealthy individuals have been successful in their own ventures, and they often have a team of consultants who advise them on various aspects of a company’s development.
An important benefit of venture capital is that it can often provide seed money for a relatively low cost. As time passes, the costs associated with obtaining a traditional bank loan begin to outweigh the benefits. Therefore, a number of new small business investment companies have been established which can provide necessary funding for a small business without the need to rely on outside funding. Small business investment companies offer a number of options to meet the unique needs of individual entrepreneurs.