Venture Capital and the Startup Business
Venture capital is a type of private equity funding that is given by venture capital companies or groups to early-stage, startup, and emerging businesses that are deemed to have high profit potential or that have proven high competitive advantage. Venture capital funds also typically invest in technologies that are risky in the eyes of the venture capital firm. These investments are typically made with the intention of making a substantial return on the individual investor’s investment within one or two years. While these high risk ventures can be successful, they are also very likely to face bankruptcy or other significant financial difficulties during the time that they are in operation.
There are several sources that provide information on venture capital funding levels for small businesses. The Small Business Administration (SBA), a division of the U.S. Department of Commerce, is one of the leading sources of information on capital raising for small businesses. The SBA publishes an annual report detailing SBA-funded startups in businesses that are approved for SBA financing. Because of the high level of risk that is associated with these types of programs, it is not uncommon for an individual equity partner to need to raise additional capital from a group of venture capitalists in order to finance the business through the SBA.
Individual entrepreneurs, meanwhile, are another source of venture capital funding. In years past, some entrepreneurs used their personal savings to provide seed money for startup ventures. Other entrepreneurs have raised venture capital through traditional means, such as angel investors and wealthy individual investors. Venture capitalists are individuals who invest in startups in exchange for a share of the profits that the business will make. Typically, these individuals invest with the expectation of receiving a return on their investment within one year to three years.
Private equity and venture capital funds are not the only methods of small business finance available. Many wealthy individual investors, for example, have provided significant seed money to startup companies in an effort to help these companies develop into profitable enterprises. Other common types of investor relationships include mortgage investment banks, real estate investment banks, and private equity firms. Most of these relationships result in a passive income stream for the venture capitalist while the entrepreneur receives growth capital at a very low cost.
Venture capital markets are simply the current manifestations of the entrepreneurial spirit in the business world. Entrepreneurs are attracted to new companies that present a chance to earn a high percentage of profits in very short periods of time. The ability to start a business and keep it open for minimal investment is appealing to most entrepreneurs. The idea of receiving a steady flow of cash without having to repay investors also makes venture capital appealing to most entrepreneurs. In addition, new companies are likely to face many risks because they are new, which makes venture capital financing attractive. Venture capital markets also represent a way for entrepreneurs to test the water before making major investments in their businesses.
However, the attractiveness of venture capital for startups is not limited to its high potential return on investment for the initial investors. It is also highly attractive for startups because of the opportunity to create a significant amount of new company value by taking advantage of new technological or other market breakthroughs. This allows investors to receive a higher return on their initial investment. Venture capitalists are also usually able to provide a good amount of collateral for a loan which makes the process of securing a loan easier than with more traditional financing methods.
