Venture Capital and Investing
Venture capital is a type of private capital financing that’s provided by venture capital funds or private equity firms to startups, pre-seed, and early-stage companies that are deemed to have medium to long growth potential or that have shown proven success in prior market segments. These companies are given the opportunity to raise money from private equity firms as a company and therefore are given the chance to raise a significant amount of money for start-up costs, development costs, and eventually expand their business into other markets. However, this funding method has received a lot of criticism from many in the financial and business communities because of the risks involved with such financing methods. Because of this, there are currently limitations and restrictions placed on venture capital financing by the SEC.
Investors in venture capital funds must be approved by the SEC before providing them money for investment. This approval process involves a lengthy and rigorous due diligence process. Once the company is approved for venture capital funding, it is also required to provide audited financial statements to the investment fund’s principal members and the SEC within a year of the funding. If anything in the initial report presents a negative issue, the company could be subjected to delisting from the Nasdaq and/or the Pink Sheets.
In addition to being a great source of investment capital, venture capital represents a unique source of indirect and direct funding for many small businesses. This indirect funding source allows entrepreneurs to tap into larger financial resources that they would not normally have access to. For example, venture capital funds typically provide seed money to upstart businesses in exchange for a percentage of the profits from the business. However, this percentage depends upon a number of factors including the business type, potential market size, and the creditworthiness of the company’s applicants. Private equity firms also provide indirect funding through stock sales and dividends. These funds are usually not registered under the Small Business Administration or an equivalent agency, making them even less transparent than investment banks.
As an increasing number of entrepreneurs seek out angel investors as their primary method of obtaining capital, new and innovative venture capital funding companies have emerged to fill the gap left by the disappearance of traditional investment banks. Angel investors usually are able to provide seed money for an exceptionally high valuation or they can take a position in the business through an warrants agreement. Companies interested in going public may need to register with the SEC to meet U.S. Securities Exchange Commission requirements. Venture capitalists can also provide additional assistance when business development and other key steps are undertaken, in order to help companies obtain needed licenses and other federal and state legal forms. They are also responsible for evaluating the technical and managerial aspects of a company as well as retaining the services of management and key employees.
Whether an angel investor provides seed money, develops a business idea, provides growth capital, or is an investor involved in an acquisition, every small business owner can greatly benefit by using the services of venture capital. Venture capital provides significant advantages to those looking for ways to increase their business access to needed working capital, as well as other types of capital. Angel investors are not only extremely knowledgeable about the latest trends and investments, they also possess a deep understanding of which companies are likely to generate growth in the future. As a result, they will be able to choose companies that are likely to experience large dividends, as well as those with financial growth prospects. Moreover, an angel investor will often work alongside a business owner to develop the company’s management and leadership.
Venture capital represents a major portion of total dollars invested in small, medium, and large companies throughout the United States. While there are a number of sources for venture capital, the best sources include angel investors, venture capitalists, financial institutions such as commercial banks and credit unions, third-party financial investors, technology companies, real estate investment firms, private equity firms, and Yahoo! Systems and Microsoft. The Internet has provided an ever increasing number of ways in which these private investment opportunities can be achieved.