Venture capital is essentially a type of private equity funding that are given by venture capital firms to early-stage, startup, and emerging businesses that are deemed to possess high potential for growth or that have shown great success in prior markets. Venture capital also can be used by venture capitalists to support companies that demonstrate an initial public offering (IPO) as well as those that have entered into initial public market offerings. In recent years, a number of new types of venture capital have emerged, such as the angel network and the venture capital firm. The latter facilitates the referral of new business opportunities to venture capitalists on an individual basis, rather than through a wider selection of investment groups such as venture capitalists.
An individual investor usually applies for both types of funding. He or she will typically prepare a business plan along with financial forecasts and possible revenue and cost estimates. The venture capital firm then analyzes these data to determine whether the business has the potential to generate high profit on a long-term basis. Once a venture capital firm decides to invest in a business, they will make the determination of which type of investment to make. They will either offer seed money, which is given without any commitment, or they will require an equity injection from an individual investor.
Seed Money Small businesses that do not generate significant revenues are often suitable for seed money funding. These businesses may come up unexpectedly, especially if they are based in developing countries, but there is still the chance that they will succeed. A large number of potential investors will provide seed money to new and small businesses so that they can continue developing and growing on their own. Many venture capitalists choose to provide seed money to small businesses that are operating within a limited scope and industry. They may not necessarily be technology companies. If the business has a product that is useful to a larger segment of the population, then it will appeal to a larger number of potential investors.
Equity Investing Venture capitalists use the equity of the company as the source of funding. Usually, they obtain a significant amount of cash up front and use the rest of the funds as investments. They usually prefer to invest in businesses where they have a vested interest in the future success of the business. However, they will also consider companies that are industry related. Venture capitalists should be careful, however, because pension funds are also a target by many entrepreneurs.
Pension Funds An increasing number of potential venture investors are turning to pension funds in order to fund their businesses. Venture capitalists will typically partner with a qualified, experienced, and well-established public pension fund manager. The investment strategy will be one that will produce a steady income for the investor over time. By planning a portfolio of different types of venture capital investments, public pension funds can provide long-term reliable funding for their investors.
Private Equity Investing With private equity comes with its own set of challenges. Investors must determine if they have the resources to invest in a given business prospect. Private equity will usually require an initial investment of between six to ten percent of the company’s capital. Venture capitalists and institutional investors also make an investment in the same company.