Venture capital is an essential form of private equity funding that is offered by venture capital funds or private equity firms to startups, new companies, or emerging businesses that have shown strong growth potential or that have been proven to have high potential for revenue. In exchange for equity in your business, these funds provide you with the money you need to launch or expand your company. While venture capital provides seed funding – the company’s first hard money – it does not typically provide credit facilities (although some companies do).
Unlike other forms of private investing, venture capital funds do not typically make loans. Instead, they invest in shares of the new companies, with the goal of creating higher value for their investors. The reasoning behind this is sound: the only people who will typically see the benefits of such investments are the ones who buy the shares at the right time. Those who wait too long will miss out on the rising value of their shares. In contrast, those who are ready to buy are likely to get a good return on their investment. Thus, the timing and the attractiveness of these types of investments are often quite appropriate for new companies.
As with all types of private equity and financing, there are benefits and drawbacks to this type of fund. One of the most obvious advantages is the ability to raise relatively small sums of money compared to the typical mortgage or corporate loan. This makes venture capital preferable to these kinds of investors. Additionally, because these companies are not publicly traded, they do not have the same potential for exposure to market risks that publicly traded companies have. Finally, venture capital firms generally control a good portion of the total equity in the company, so they retain a greater stake in the company’s future success than other private equity investors may.
While venture capital is attractive to smaller companies and newer businesses, it is not appropriate for established or bigger companies. The reason is simple: it is difficult for established businesses to raise large sums of capital, and they typically have longer operating cycles. New businesses, on the other hand, are more sensitive to market fluctuations and can experience short-term losses due to downturns in their market. Also, larger venture capital investments typically have repayment terms that are much shorter than those of traditional loans, and they carry a much lower risk due to the fact that they are backed by a valuable asset (usually a technology platform) instead of an intangible piece of property.
To become an accredited investor, a company must meet certain requirements. First, it must be one of the minority equity holders in an entity; second, it must have an unlimited ability to borrow; and third, it must be registered under the appropriate laws. These three requirements make it much easier for an institutional investor to incorporate as an accredited investor and provide more opportunities for venture capitalists to access their funds.
In summary, a venture capitalist is an individual with an interest in a particular start-up and willing to invest money in that start-up. If you are an angel investor looking for venture capital funding then you will probably want to work with an experienced venture capitalist who can help you identify companies that are in early stages of development. You should be prepared to provide them with a detailed business plan detailing your expectations for sales, your financial projections, management information and more. Remember that these expectations will need to be in line with what you expect to earn back on your investment.