Venture capital is basically a form of private equity funding that is offered by venture capital firms to budding, emerging, and late-stage companies which are deemed to have medium to high growth potential or that have shown great potential for growth in the past. Venture capital is one of the fastest growing fields in private equity funding. This form of financing was not always so attractive to companies, but recent changes in tax laws and state regulations have changed the face of venture capital funding. Venture capital firms used to only make investments in “surety companies,” usually banks, but in today’s day and age they are funding more businesses than ever before including angel investor networks, early stage businesses, and companies that have raised seed investment from multiple sources. The main types of venture capital funding are:
Seed Fund – Seed funds are made available to potential investors by venture capital firms. A seed fund is typically offered to startups with little to no start-up capital. Typically, venture capital funds take a hold of a company for at least three months while the company develops its business plan and works out an operational structure. After the companies has built its business framework the venture capital firm generally provides financial backing and assistance to help the company obtain necessary licenses, meet legal requirements, and successfully launch and manage its business operations.
Commercial Lending Companies – With the advent of the internet there has been a significant increase in the number of accredited private equity (C.E.O.) finance companies who are now providing funding to small and medium sized business. In addition to offering funding to startup companies, these C.E.O. funds also provide seed capital to mid-sized companies.
Seed and Series A Investors – Venture capital deals can be made directly with angel investors or venture capital firms. Many angel investors have either already completed funding rounds for similar companies or are willing to provide seed money to a new company. These venture capital firms generally require that the companies they invest in have strong business plans that are based upon strong leadership and significant potential.
Private investors – Venture capital investment banks are the primary source of private funding for many companies. Most venture capital investment banks are focused on only few sectors, such as technology, software, communications, health care, and electronics. They will not invest in companies that do not fit into one of their portfolio industries. Most investment banks will require the companies they are financing to show a strong business plan that clearly outlines their expectations for future growth and profit.
Angel Investors – Many wealthy individual investors work with venture capital firms to provide seed money to small businesses. Some of the most prominent venture capital investors are angels who are wealthy individuals who have made large contributions to high net worth individuals. These angel investors normally have little to no start up capital and rely on a series of complex financial maneuvers to obtain capital for small businesses. These angel investors often play a major role in the day to day management of a company and are an important part in determining the success of a company’s future growth and profits.