Venture Capital Investing 101
Venture capital is an uncommon form of private equity capital. Typically it is offered by outside investors to typically new companies that promise to develop quickly. Venture capital investments are often very high risk, but provide the potential for great above-average profits. A venture capitalist ( VC ) is someone who makes these investments.
The typical venture capital firm will invest their funds in early stage companies around the world in industries that are currently growing strongly. These firms will likely focus on industries with products or services that have the potential to have a large market. Venture capitalists are individual investors that pool their investment capital to start-up companies. Many venture capitalists are wealthy individuals and have made significant amounts of money in their past ventures.
When an angel investor invests their funds in your startup, they do so with the understanding that the company has no realistic chance of becoming successful until a series of circumstances occurs. Usually, an angel investor will make an initial investment of a small amount of money, and then wait for your company to show true strength before making a larger investment. The typical length of time an angel investor will remain involved in a company is one year. Most venture capitalists will not make any commitment during the start-up phase of your company, but will likely invest in subsequent years as the company has demonstrated its ability to build a business.
Private equity firms provide seed money for new companies. Seed money is typically loans of less than $100 million that companies use to acquire office and computer equipment, develop products, and hire employees. An experienced venture capital firm will be able to provide you with a large number of well qualified partners that have backgrounds in different areas of your business. Partnering with an experienced vc firm will help your business obtain much-needed venture capital investments at a low cost. VC firms are highly skilled at finding companies that have promising business plans, strong management teams, and good management teams.
Venture capital firms also fund limited partnerships, or LPs, which are composed of a series of investors that are financially related to one another. This type of equity structure provides limited liability, which makes it easier to obtain credit from other private equity firms or banks. As with LPs, VPs are made available to companies that demonstrate growth potential. Limited partnership units are typically funded using a combination of debt and equity, with most investments being made in the early stages of the company’s development.
Private placements are an integral part of venture capital investing. Placements are where money is raised from the financial industry in exchange for shares of your company’s stock. Because these types of offerings require higher risk, they are often used for the majority of the company’s start-up costs. The downside to placements is that they are not immediately available to accredited investors. Small/growing companies may not be able to qualify for these funds because they do not meet the investment requirements for traditional venture capital investors.