Types of Venture Capital
Venture capital is the investment capital provided by venture capital companies or funds to budding, early stage, and growing businesses that are deemed to have high earning potential or that have proven high growth potential. Venture capital funds play a major role in the overall success or failure of a business, as they make large investments in these businesses without the concern of immediate profits. However, this investment strategy can backfire, especially for smaller businesses that lack the capacity to raise the required funds from venture capitalists. A venture capital firm typically seeks to provide early stage companies with the resources and guidance they need in order to successfully penetrate the business market.
Venture Capitalists Fundraising: Most venture capitalists fund their investments through pension funds, insurance company, and individual retirement account plans. In most cases, venture capitalists will use a combination of one of these traditional sources of funding to provide seed money to new ventures. However, in some instances pension funds may decline to finance a new business startup due to regulations that limit the types of investments that can be made within the program. Some venture capitalists will turn to angel investors to fund new ventures, particularly in the areas where the entrepreneur has an expertise. For example, if an investor owns a small business that manufactures medical equipment, then he may seek to acquire shares from an ongoing series of medical equipment sales in order to fund future expansion. Venture Capitalists may also opt to obtain financing from other sources, including banks, brokerages, investment groups, and the Internet.
Funding Sources: While most venture capitalists choose to fund new ventures using a combination of investment funds, some prefer to obtain a source of funding from only a select few sources. Typically, this source of capital will come from a primary financial institution such as a bank or credit union. These sources of capital have less stringent requirements when it comes to investment and borrowing practices than do other venture capital investors. These investors also tend to have a long history with the small business that they are financing.
Angel Investors: Angel investors provide seed money for the purpose of starting and operating a small business. They typically possess a net worth of at least six million dollars. Typically, angel investors work with companies in which they already have a significant stake, such as purchasing a stake through a private placement or a limited partnership. Most venture capital firms will not provide seed money to small businesses unless the companies meet a set of rigorous requirements related to their business plan. An investor’s portfolio will include a high net worth individual with a track record of success in operating small businesses.
Private Equity: Similar to angel investors, private equity is offered by venture capital firms. Like angel investors, private equity is used to fund companies primarily for purposes of building equity. Private equity funds can be either general or specialty in nature. Many private equity firms focus on providing short-term financing, while other firms invest in start-ups for the long term. Most venture capital firms also deal with financing transactions for companies that are no longer within the core capabilities of the company.
Private Placements: Similar to angel investors and venture capital, private placements, or IPOs, are investment securities sold by private equity firms to accredited investors for the purpose of raising funds. The most common types of private placements include initial public offerings (or IPOs), common stock offerings, warrant issuances and debt offerings. Although most venture capital and private equity investors work with companies that are still early stage companies, there have been increasing numbers of firms that specialize in helping provide financing to late-stage companies.