Venture Capital

Venture Capital is a type of private equity and describes money provided by investors to startup firms as well as small, early-stage and/or emerging businesses with perceived long-term growth potential.

Company’s Perspective

Every year, there are nearly 2 million businesses created in the USA, and 600-800 get venture capital funding.

Venture capital is attractive for new companies with limited operating history, that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering.

Venture capitalists typically assist at four stages in the company’s development:

  1. Idea generation

  2. Start-up

  3. Ramp up

  4. Exit

It is a way in which an institution can be constructed that systematically creates networks for the new firms and industries, so that they can progress. This institution helps identify and combine pieces of companies, such as finance, technical expertise, marketing know-how, and business models. Once integrated, these enterprises succeed by becoming nodes in the search networks for designing and building products in their domain.

Investor's perspective

Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. In exchange for the investment, the venture capitalists usually get significant control over company decisions and a portion of the equity.

Investors are primarily interested in companies that have a novel technology or business model in high technology industries, such as biotechnology and IT. Funds focus on ventures with exceptionally high growth potential, as only such opportunities are likely capable of providing financial returns and a successful exit within the required time frame (typically 3-7 years) that venture capitalists expect. Venture Capital is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.

The return of the venture capitalist as a shareholder depends on the growth and profitability of the business. This return is generally earned when the venture capitalist “exits” by selling its shareholdings.

The Venture Capital Investment Model

There are typically six stages of venture round financing offered in Venture Capital, that roughly correspond to these stages of a company’s development:

  1. Seed funding: prove a new idea

  2. Start-up: firms that need funding for expenses for marketing and product development

  3. Growth: early sales and manufacturing funds (typically VCs come in here)

  4. Second-Round: early stage companies: selling products, but not yet turning a profit

  5. Expansion: for a newly profitable company

  6. Exit of VC: through secondary sale or an IPO or an acquisition

Bridge Financing: startup seeks funding in between full VC rounds.