Venture capital is a type of private equity funding which is offered by venture capital funds or individual venture capital companies to startups, mid-stage, and established companies that have proven to have high potential for growth or that have shown impressive growth in the past. Venture capital funds are normally organized as limited liability companies (LLCs). Under the laws of the US, most private equity investors are restricted from participating in a transaction in which the principal puts their entire investment in risk (subject to the equity holder’s rights of redemption). The IRS regulations also state that the principal must administer the venture capital fund and must be personally liable for the investments of the fund.
Private equity firms usually provide seed financing and later obtain real estate or an outstanding commercial property portfolio as part of the deal. The venture capitalists typically have an investment portfolio that includes real estate, consumer portfolios, technology portfolios, manufacturing portfolios, and energy portfolios. In the case of the real estate portfolio, it is common for the venture capitalists to purchase multiple properties.
Most small businesses do not need venture capital. However, when a business is in its early stages, it needs extra financial assistance to stay afloat during initial operations and to help the business obtain a patent, trademark, or commercial purpose. This can be obtained from the Small Business Administration through a loan program called SBA loans. When the business is developed enough to stand on its own, then the venture capitalist can continue to provide ongoing support by purchasing preferred stocks.
Venture capitalists look for high-growth, potential companies that don’t have any readymade market niche. A few common types of these companies are software companies, computer companies, Internet companies, and wireless companies. Usually, they are faced with a high start-up cost and are unable to compete with established companies which have established themselves in the market. Venture capitalists therefore prefer to partner with entrepreneurs with an entrepreneurial bent, especially if they have backgrounds in business, engineering, finance, and marketing.
Most venture capitalists require entrepreneurs to perform a series of tasks in order to compile their portfolio. These tasks include performing due diligence on their chosen startups, evaluating the business model, evaluating financials, interviewing business executives, reviewing business plans, researching competitors, evaluating management teams, evaluating financial statements, etc. In addition, the portfolio also needs to contain financial information such as current and future debt obligations, credit ratings, business valuation, etc. Most venture capitalists will require the startups to submit their executive officers, CPA, CFO, and business plan to help them evaluate them. Entrepreneurs also need to submit an executive summary to provide a clear picture of the company’s management team and key personnel. The final results of this process are then used to select the portfolio company for seed investment.
In order to receive seed funding from a venture capital firm, it is important for entrepreneurs to present a high-quality business plan. Many companies that successfully raised venture capital through Angel investors do not have a clear business plan. Companies must first be able to present a strong business plan to potential investors before being considered for a seed funding round.
