Venture capital is a
type of equity financing that addresses the funding needs of entrepreneurial
companies that cannot seek capital from more traditional sources.
Venture capital (VC) is
financial capital provided to early-stage,
high-potential, high risk, growth
startup companies. The venture capital fund makes money by owning equity in the
companies it invests in, which usually have a novel technology or business
model in high technology industries, such as biotechnology, IT, software, etc.
The typical venture capital investment occurs after the seed funding round as
growth funding round in the interest of generating a return through an eventual
realization event, such as an IPO or trade sale of the company. Venture capital
is a subset of private equity. Therefore, all venture capital is private
equity, but not all private equity is venture capital.
In addition to angel
investing and other seed funding options, venture capital is attractive for new
companies with limited operating history that are too small to raise capital in
the public markets and have not reached the point where they are able to secure
a bank loan or complete a debt offering. In exchange for the high risk that
venture capitalists assume by investing in smaller and less mature companies,
venture capitalists usually get significant control over company decisions, in
addition to a significant portion of the company's ownership (and consequently
value).
Venture capital is also
associated with job creation, the knowledge economy, and used as a proxy
measure of innovation within an economic sector or geography.
It is also a way in
which public and private actors can construct
an institution that systematically creates networks for the new firms and
industries, so that they can progress. This institution helps in identifying
and combining pieces of
companies, like finance,
technical expertise, know-hows
of marketing and
business models. Once integrated, these enterprises succeed by becoming
nodes in the search networks for designing and building products in their
domain.
Venture capitalists
typically assist at four stages in the company's development:]
Idea generation;
Start-up;
Ramp up; and
Exit
Some
of the factors that influence VC decisions include:
Business situation:
Some VCs tend to invest in new ideas,
or fledgling companies. Others
prefer investing in established companies that need support to go public
or grow.
Some invest solely in
certain industries.
Some prefer operating
locally while others will operate nationwide or even globally.
VC expectations often vary. Some may want a quicker public
sale of the company or expect fast growth. The amount of help a VC provides can
vary from one firm to the next.
Need of venture capital
There are entrepreneurs
and many other people who come up with bright ideas but lack the capital for
the investment. What these venture capitals do are to facilitate and enable the
start up phase.
When there is an owner
relation between the venture capital providers and receivers, their mutual interest for returns will
increase the firms motivation to increase profits.
Venture capitalists
have invested in similar
firms and projects
before and, therefore,
have more knowledge and experience. This
knowledge and experience are the outcomes of the experiments through the successes and
failures from previous ventures, so they know what works and what does not, and
how it works. Therefore, through venture capital involvement, a portfolio firm
can initiate growth, identify problems, and find recipes to overcome them.