Venture capital is basically a type of private capital financing which is offered by private venture capital firms or private funding sources to budding, upcoming, and established companies which are deemed to have exceptionally high potential for growth or that have proven extremely high competitive advantage. In most instances, venture capital funding is provided on an as-needed basis, which means that companies may receive funding at the time of need, without having to wait for years before their business becomes profitable enough to generate additional venture capital funding. There are a number of different types of ventures that venture capitalists may invest in, including initial public offerings (or IPOs), derivatives, and the purchase of an outright manufacturing facility. Private equity firms also provide funding in the areas of acquisitions, investments, and mergers & acquisitions. In addition, venture capital firms may also provide funding in the fields of distressed investments, growth capital, and early-stage businesses. In a nutshell, venture capital funds are used to fund a company as it looks to maximize its profit and minimize its risk.
Before a venture capital funding company will commit to providing funding to a venture, they will first review a company’s financial statements, financial, and current operations. If these documents are satisfactory to them, then an offer to invest will be made. The individual investors participating in a venture capital investment will then give their individual investment money to the venture capital firm so that it can use it to invest in a variety of different ways, such as expansion, marketing, R&D, and related facilities. Once the funds are used in a given venture capital investment, all of the individual investors will receive a portion of the profits from that company. This system helps to make sure that only the most promising companies get funding, and therefore helps to keep the prices of these types of venture capital investments down.
One of the biggest differences between venture capital and private equity is that the latter typically requires much more collateral than the former. Because of this, venture capitalists prefer to provide seed money or small amounts of capital to start-ups rather than making large, multiple-million dollar acquisitions. As venture capital funds are less willing to provide private equity to companies that are not making profit or generating significant growth potential, most angel investors prefer to provide seed money for small start-up companies. However, many private equity firms have recently begun funding larger companies, as well as mid-size and large companies.
The reasons private equity firms choose to invest in start-ups rather than bigger companies are varied. In some cases, the companies may simply lack the expertise or resources to generate a large profit on their own. In other cases, the entrepreneur may believe that his business is worth more than the amount he is willing to put up initially and could turn a profit with the help of venture capital firms. Also, venture capital firms are usually made up of highly skilled professionals who know how to spot good business opportunities, where they are likely to emerge, and how to take advantage of those opportunities once they happen. Finally, venture capital firms look at a company’s management team and management structure, the financial statements, and the market in general before deciding whether to invest in it.
Private Equity. A venture capital investor typically provides start-up funding, although he may also consider investing in an already existing business. The venture capitalist generally wants to retain control of the business, and therefore will not invest unless the owner agrees to allow him to do so.
Seed Capital. A venture capital firm generally loans only a portion of the total amount of money needed to launch and grow a business. Most venture capitalists will provide start-up money, but may also provide partial or full financing in later years, depending on the company’s performance and ability to generate profits. In some cases, a venture capital firm may not provide any seed capital funding.