Venture Capital Funding
Venture capital is a type of private equity funding that is offered by venture capital funds or private equity firms to startups, new companies, or emerging companies which have been deemed to possess high potential for growth or which have shown impressive growth in the past. Venture capitalists are usually individual entrepreneurs with successful track records who apply for venture capital investment. They generally have an MBA and a good understanding of finance. As venture capitalists fund more companies, the tendency is for the companies to become top-notch and for their products and services to become widely available. As a result, many times they provide seed funding to start up a company or provide a general advisory service to a larger firm.
Venture capital firms offer equity as an equity type of financing. Equity is the part of the company that a person or group of people own. Venture capitalists participate in a partnership with the startup or small business. This partnership is designed to help the company make a profit so the venture capitalists can receive a percentage of the sale price of the equity.
Private equity firms typically invest in either fixed income or in variable income investments. Venture capitalists seek to provide seed money to newer companies as well as those with larger operations. The venture capital firm will use the funds generated from the investment to acquire businesses or to support accelerated growth or to expand existing businesses. As a part of the agreement, the venture capitalists will be repaid when the company makes a profit.
Most of the time, venture capitalists are not involved in the initial public offering (IPO) stage of business growth. In the past, they did not participate in the financing of IPOs because they felt that the startups were not strong enough to generate lucrative future investments. The IPO process is risky for the investors because it exposes them to the risk of the business’ failure. However, the IPOs initiated new sources of investment and provided another revenue stream for the budding entrepreneurs. Thus, today, most venture capitalists participate in IPOs because they provide an excellent source of income and potential for future profits.
Angel Investors: Many aspiring entrepreneurs may not have the financial means to obtain a loan or credit facility from a bank. Angel investors typically invest in the beginning stages of a business’s development as private individuals or organizations. Typically, the angel investors invest their own money in the startup and do not provide credit facilities to the entrepreneurs. The term ‘angel investor’ refers to someone who provides seed funding to an individual or group of individuals or a group of businesses.
Private Equity Funding: Another source of venture capital funding is from private equity firms. An equity firm is an investment fund that collects funds from outside investors for the purpose of making a profit. In recent years, the number of equity firms has risen. Some equity firms are specialized in making only high-end private equity investments. Examples of this type of firm are hedge funds and private equity firms.
