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Types of Venture Capital and Funding Levels Related to Venture Capital

Venture Capital

Types of Venture Capital and Funding Levels Related to Venture Capital

Venture capital is a type of private equity financing which is offered by private venture capital companies or networks to startups, pre-stage, or emerging businesses that are deemed to have strong development potential or that have shown high earnings potential. The term venture capital basically refers to raising money for a business by means of a partnership. This type of funding is one way for a business to raise funds from a third party. The venture capital firm or network generally partners with the business to identify a strategic business partner that shares the vision and mission of the business. The venture capital firm then facilitates and executes the venture capital investment, providing the required seed financing, working with the entrepreneur to build the business, and ultimately closing the deal.

Small/home businesses that are looking to raise seed capital can take advantage of several options such as obtaining an angel investor, high-growth venture capital, and/or joint ventures. Angel investors are wealthy individuals who provide small amounts of capital to fledgling startups in exchange for a stake in the business. Examples of well-known angel investors include Sequoia Capital, Kleiner Perkins, Annenberg Financial, and Draperables. High-growth venture capital involves securing small amounts of venture capital from a number of high-growth companies in order to finance development costs and purchase necessary equipment.

Most banks provide lines of credit which may be used to provide seed capital. Typically, you will need to provide the credit card information associated with your bank account when you apply for a line of credit, unless your bank offers an alternative such as direct deposit. Most venture capitalists fund through equity investors and there are some that invest exclusively through private equity firms. If you are an entrepreneur that is seeking venture capital investment, you should know the advantages and disadvantages of these methods. These include the need for personal credit and reputation management.

Private equity funds are created by individual private investors and companies. The primary objective of these types of venture capital firms is to obtain a substantial portion of the business from an established or new company. The downside of this method is that it usually takes years before the firm makes a substantial profit. The upside includes the ability to raise a large amount of money quickly and at less cost than an angel investor.

In the past, venture capital funds were not accessible to small businesses because of a lack of accreditation. However, in response to a need for more credibility and trust, most private equity firms are now accredited by the Small Business Administration (SBA). Additionally, several venture capital companies offer guarantees and tax benefits for new business owners. An important consideration is that these companies generally charge higher rates of capital than their counterparts who do not offer such benefits.

The final type of financing available to entrepreneurs is Seed Capital. Seed Capital allows an investor to receive a percentage of the sale proceeds generated from a startup business based upon the word of mouth marketing of the investment. Seed Capital is not backed by equity but is typically supported by personal credit lines and/or investors’ personal guarantee of the company’s future success.