Venture capital is a type of private equity funding that is often provided by venture capital funds or individual venture capital firms to startups, upstarts, and other emerging companies who have been deemed to have medium to high potential for growth or that have shown clear signs of being able to attract investors and customers. This type of financing is often used for companies that are in early stages of development. The companies receive seed money from a venture capital firm so that they can develop their business. In return, the venture capital firm provides a series of regular payments to the company to keep the company running. Venture capital firms typically make investments in many different companies each year.
Many private equity funds and venture capital firms offer funding to start up businesses as well as to expand and help companies grow into profit. However, there are some differences between the two. For a small startup, the level of investment can be relatively low, as most angel investors and venture capital funds require a minimum investment of less than $100k. This amount is much lower than the money needed to provide an executive suite for a new CEO or significant upfront start-up costs. A large amount of venture capital is also not necessary to support a large business, as most venture capital funds require a percentage of ownership in the company, typically a percentage of the stock issued.
Another difference is that most venture capitalists and private equity investors focus more on the ability of the company to generate a profit rather than on the future earnings of the company. They may provide seed money for early stage companies whose revenues are still low, as long as the company has potential. They may also focus on potential growth opportunities in a company, though they may be much smaller than large established corporations.
Seed money, or early stage money, represents investments in a company’s future potential. The early stage of venture capital funding is far less expensive and involves only a low risk. For most entrepreneurs, it is during this time that the business plan is drawn up, a substantial amount of work done to identify strengths and weaknesses, and a clear description of the intended business model to present to investors. Most venture capital funds offer seed money to a limited range of businesses, usually no more than five, though depending on experience and the need of the entrepreneur, the number of investors can increase as the company expands. In addition to seed money, venture capital funds provide ongoing support based on a number of different factors.
The two main sources of private equity funding are angel investors and venture capital funds. Angel investors are usually wealthy individuals, often families who have recently received investment capital and are using it to invest in a business opportunity. They provide seed money and/or are involved in the day to day operations of the business, but do not usually invest beyond the initial financing. As such, their involvement is limited to almost always being a partner, so the business must show potential in order for them to secure such funding.
Venture capitalists are generally wealthy individual investors, with high net worth. The purpose of a venture capital firm is to provide a third party financial support to small businesses looking to raise money. Unlike angel investors, venture capital firms do not normally require a personal guarantee, although they do require a high net worth individual or organization to provide the required investment. Most venture capital firms are active throughout the country, seeking high net worth businesses to finance.