Venture capital is a type of private equity & a type of financing that investors invest in start-up firms & small enterprises that are supposed to have continuing development & expansion possibilities.
Although venture capital emphasizes monetarily, it is also provided in other categories, such as supervisory and technical expertise. Venture capital does not necessarily appear in the company’s initial stages but can be utilized at different phases when the company evolves.
Venture capital has become the most used form of funding over the years. Sources such as venture capital funds, investors, financial entities, and investment banks play a key role in providing venture capital. In venture capital funding, most of the company’s ownership is created and sold to investors through individual limited partnerships that venture capital firms establish.
Features of venture capital
Risk factor
Venture capital requires funding by individuals into new ventures that are in the initial stage of the company, and that, of course, is very uncertain to succeed in the future company goals and objectives. The return on investment depends entirely on the company’s failure or success.
Lack of liquidity
Investors cannot withdraw venture capital investments in the short run. They are essentially long-run investments either in the form of convertible securities or loans.
Long term Investments
Venture capital is meant for long-term monetary relations, which assists companies in their growth and expansion in the initial stages of the business. It is initiated by buying equity capital that offers returns in the long term. It’s not recommended for entities who are interested in getting profits in a short span of time.
Financing new companies
It involves funding finances for start-up companies which are difficult in their early stages. Various investors easily attract companies with a unique purpose or great potential for higher returns.
Funding venture capital
Pre-Seed Stage
Pre-seed stage capital is when capital is provided to an entrepreneur to help them develop an idea.
Seed-stage
Seed stage capital is when capital is provided to help an entrepreneur (or potential entrepreneur) develop their idea into an early-stage product. This is a small amount that a businessperson obtains for the purpose of being qualified for start-up credit.
Early-stage
Early-stage capital is when capital supports product development, marketing, commercial manufacturing, and sales. This stage promotes commercial manufacturing, sales & development, and product development.
Later-stage
Later stage capital is when capital is the venture capital provided after the business generates revenues but before an Initial Public Offering (IPO). Major expansions, product improvements, huge marketing campaigns, and M & A require this type of capital.
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Parameters
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Angel Investors
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Venture capital
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Private Equity
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Investment Plan
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They are more flexible in whom they invest because they are investing their personal money. By exiting an IPO or merger & acquisition deal, angel investors expect a return on investments.
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A fund theory & fiduciary responsibility are involved in venture capitalists’ LPs. Thus, there is less flexibility in how they invest. Like Angel investors, VCs expect ROI through exiting an IPO or M&A deal.
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Private equity can change the business- they can buy the company, expand its operations & then exit the firm through reselling the same, mostly for profit.
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Company Stage
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They are the early investors in a start-up company (pre-seed & seed). They fund even less or even no customers at all.
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VCs are prime investors in companies whose technology or product is functioning and who have a few or more customers. They support you to evolve your company to the next level.
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They Invest in recognized and established companies. Their role comes after raising funds from venture capital. They help companies struggling with their operational incompetence.
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Investors
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They are wealthy & attributed individuals investing their personal money in various start-up companies
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General partners are investors who work for VCs & invest in other Limited Partner’s funds which could be sovereign wealth funds, well-off family trusts, pensions funds, etc.
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They invest directly in an established private company. Unlike VCs & Angel investors, they don’t usually fund startup companies.
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Risk Degree
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They stand a chance of higher risk since they invest in startups with no customers or products or technology.
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VCs invest in companies that have already passed the pre-seed or seed stage. Thus, they have lower risks of loss than angel investors.
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They have both the lowest returns on investments and risk since they only aid established companies on the operational front. They have the flexibility to sell the company for a profit.
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Pros & cons of venture capital
Advantages
- Large capital can be raised.
- Managerial & technical expertise are offered.
- Support is provided to manage the risk involved.
- Great exposure to learn and grow.
- Future raising funds is possible
- Venture capitalists are mostly reliable
- They help with hiring the best resources to build a team
555Startup companies usually fail to provide security as collateral. Though, VC doesn’t require any security to provide any funds.
Disadvantages
VC is a type of equity capital that is higher in costs than debt-equity.
- Since the large chunk of the company is sold, the ownership is reduced.
- A traditional reporting structure is required.
- Obtaining investors is time intensive and can lead to diverting from the business.
- Underachievers can lose their business.
- Leverage negotiations are occasional.
- The business is anticipated to grow speedily.
- The performance schedule plays a key role when it comes to releasing funds.
Examples of venture capital
Most popular, GV (Google Ventures) invests in various industries, including hardware, software, biotech, health care, customer care, & clean tech. They are among the highest funding investors who are up to millions of dollars throughout the different stages of a company and its need for funds.
Salesforce
Based in San Francisco- California, Salesforce was established in 2009 and is a corporate venture arm of Salesforce.com. They invest in cloud-based & tech companies.
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