Venture capital can be defined as a kind of private equity that is made available to new companies which show a serious potential for growth. Venture capitalists hope to make a significant profit on their investment; either through the company’s increasing profits or through the sale of the company. Venture capitalists usually consist of a combination of wealthy individuals and investment firms.
Three Stages Of Funding
As venture capitalists see their investment as high risk, they are expecting a large return and this is a constant feature throughout each different type of venture capital. Generally speaking, venture capital takes one of three different forms; early stage, expansion, or acquisition financing. The main difference between the three types is that they occur at different stages of a company’s life.
As the name suggests, early stage financing is reserved for companies which are only beginning their operations and can be divided into three sections: seed, start-up and first stage funding. New businesses generally aren’t eligible for conventional loans, and seed financing is the sum of money given to a new company to achieve this eligibility. Start up financing is also virtually self-explanatory. This is an investment on the part of venture capitalists which covers the cost of developing services and products. First stage financing is an investment which allows companies to begin business activities after their starting capital has been used up.
Second stage, or “mezzanine” financing and helps companies to branch out. Acquisition or buyout financing can be divided into leveraged buyout financing and acquisition finance and management. Leveraged buyout financing enables the business that is being funded to purchase a particular product from another company. Acquisition financing allows venture capitalists to assist the company with a merger should the company they are investing in choose to purchase another business.
Venture Capital Problems
The biggest issue with regards to acquiring venture capital is the difficulty a company has in qualifying for it. Venture capitalists will only assist businesses that show the potential to grow quickly and look for companies that could go public or get purchased in a few years. Also, businesses seeking financial aid from venture capitalists are effectively giving up a share of their company. This means that all profits made from a successful sale will have to be shared with the venture capitalists. Yet the money invested could be the difference between the company rising or falling in the first place.
There is a huge amount of work required on the part of the entrepreneur. Any company looking for help from venture capitalists will need to have extensive business plans and financial projections outlined in great detail. Venture capitalists only concentrate on a particular sector so research is necessary in order to find firms that cater to your needs.
Firstly, it is vital to ensure that the firm you are dealing with are solvent themselves. Firms without a wide spread of businesses to cover their risk are best avoided. As funding is in stages, make sure the firm has enough money to get you through each stage comfortably. It is also vital to check their references. Previous or current clients should have plenty to say about the firm. Keep in mind that the role of the venture capitalist isn’t just to provide money, they should also be able to provide you with industry connections and expertise. You need a firm with a wide network as they can introduce you to other potential customers and financial institutions who can assist. Finally, always discuss the future with the firm. It is important to know their exit strategy so you can make plans for life after the firm.
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