Venture Capital for Startups: Understanding Venture Capital For Entrepreneurs
Venture capital is a type of private equity funding, which is offered by venture capital funds or private equity firms to new startups, pre-launch, and emerging small businesses that have been clearly defined as having high market potential or that have shown pre-seed or early-stage business development. The reason why venture capital funds provide venture capital financing is to provide a source of start-up money for these companies. When a company is in its early stages, it may not yet have the resources to conduct successful business operations. This is where venture capital funding can come in handy.
There are two types of venture capital funding. Seed rounds are used to fund small start-ups and are the first type of venture capital funding. In seed rounds, the venture capitalists provide seed money to the company for use in buying tangible assets such as inventory, office space, and furniture. These assets are then used to conduct laboratory tests, conduct business analysis, generate reports, and come up with business strategies. Once these companies gain enough experience, they can use the proceeds from their seed rounds to either purchase more capital stock, or raise additional funds through different loans and equity transactions.
Another method of venture capital funding is to provide angel investors with equity injections to a given business. Typically, most angel investors will want to see the business being operated before they provide funding; therefore, the business financing arrangement between venture capitalists and angel investors often does not occur until the company is well-established and generating profits. However, most angel investors are usually very interested in financing more than just one business; therefore, if you are interested in working with an angel investor, your consultation should be extensive.
Venture capital funds also make investments in emerging small businesses that can provide a large amount of potential income. These types of investments, though, are generally not provided through venture capital funds. The reason is because most small businesses do not generate high enough revenues to justify the venture capital investment. Therefore, most venture capitalists fund the financing of a small business using a combination of debt and equity. Venture capital funds also tend to fund a business for only one year, which allows the entrepreneur more time to develop a market for the product or service being offered. As a result, most entrepreneurs who obtain angel capital do not have to wait years before they begin selling their products and services.
Lastly, venture capitalists provide seed capital to new companies. Seed capital funds new companies by providing a personal guarantee or by providing restricted shares of stock in the company. Both methods of seed capital are risky; however, it is not impossible to raise small amounts of money through these methods. In fact, in some cases, it may actually be easier to obtain small sums of venture capital than it is to raise larger sums of venture capital from institutional investors.
To meet the challenges of raising venture capital, many startups choose to seek the guidance of angel investors. If you are planning to raise startup capital, it is best to work with professional venture capitalists instead of working with local business investors. By working with professional venture capitalists, you can ensure that your business will be provided with the maximum amount of support and guidance possible.
