Venture capital is a type of private equity financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. It generally comes from well-off investors, investment banks, and other financial institutions.
In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions and a significant portion of the companies’ ownership (and, consequently, value).
Venture capital is a subset of private equity and one method of funding young companies that do not have access to more traditional forms of financing, such as an initial public offering (IPO) or debt financing.
Venture capitalists are typically found within the highest echelons of wealth, meaning they can afford to lose their entire investment without significant repercussions.
How Venture Capital Works
Venture capital is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth (in terms of the number of employees, annual revenue, scale of operations, etc.).
Venture Capital firms or funds invest in these early-stage companies in exchange for equity or an ownership stake.
The key difference between Venture Capital and angel investing is that while an angel investor invests in a business at the very start (when it has just started), venture capitalists invest only when the business has existed for at least five years and has proven itself successful.
Venture capitalists are not merely interested in providing money; they also want to be able to play a role in the direction their investment takes through active involvement.
In return for their investments and guidance, venture capitalists typically get significant control over company decisions and a proportionate share of the profits when the company goes public through an initial public offering (IPO) or gets acquired by another company.
The Difference Between Angel Investors and Venture Capitalists
Angel investors are wealthy individuals who invest their own money in small businesses. They typically invest in 20 or fewer companies, and while they may offer advice, they aren’t necessarily involved in the day-to-day operations of those companies.
Venture capitalists are typically part of a firm that invests other people’s money in many companies, with an emphasis on rapidly growing startups. They often guide how to run the business, and they may also assist with recruiting talent or other strategic planning.
It’s Important to Know About Venture Capital before Starting a Business
Venture Capital is a term that refers to funds that are invested into a company or business. The venture capital investor helps the founders run their operations and reach new heights in exchange for a share of the startup’s profits.
Venture capital can be in equity, debt, or a hybrid of both. Equity investment is when you give an investor shares in your company instead of paying them back with interest. If you receive venture capital in the form of debt, then it functions like any other loan. You will have to pay it back with interest, just like any other loan you would get from a bank.
You can use venture capital for many things, including product development, marketing, or other business expenses. With this extra money at your disposal, you are less likely to run out of funding before your business gets off the ground and becomes profitable!
(The writer is the CEO of Epic Lanka Technologies)
By Thareendra Kalpage