Homerun Nievera, Negosentro | Venture capital refers to the financing that is provided by investors for startups and businesses that are considered to have potential for long-term growth. It usually comes from financial institutions, investment banks and wealthy investors. Venture capital is not limited to monetary form and can be provided through managerial or technical expertise. While it may be risky for investors who raise the funds, high returns are an attractive prospect.
For ventures that have an operating history of less than two years or new companies, venture capital funding has become an increasingly popular and essential source of capital, especially when there is lack of access to debt instruments such as bank loans and capital markets. Getting equity in the company means that investors can actively contribute to company decisions.
Understanding Venture Capital
Large chunks of company ownership are produced and sold to some investors through limited independent partnerships that have been created by venture capital companies. These partnerships may consist of a collection of multiple similar enterprises.
An essential difference between various private equity deals and venture capital is the focus that venture capital has on emerging companies that seek a substantial amount of funding for the first time. On the other hand, private equity usually funds bigger and more established companies that seek a combination of equity or opportunity for some of the ownership stake to be transferred by company founders.
Venture Capital Processes and Operations
The initial step for businesses that look for venture capital involves submitting a business plan to a high net worth individual or venture capital firm. If the firm or investor is interested in the proposal, due diligence must be performed. This includes an in-depth investigation of a company’s operating history, management, products, business model and other factors. Click here for mk-vc.
- Background research is crucial because venture capital usually invests larger amounts in a smaller number of companies. Venture capital professionals often have past investment experience with academic backgrounds in business administration or a professional history of being equity research analysts.
- Venture capital professionals are known for concentrating in certain industries. For example, prior experience with healthcare industry analysis may be linked to a venture capitalist that is a healthcare specialist.
- After completing due diligence, the investor or firm pledges the investment capital that is exchanged for equity in the company. All the funds may be given at once but capital is typically given in rounds.
- The investor or firm actively participates in the company that has been funded by advising and keeping track of the company’s progress before providing more funds.
VC Startup Investments
Venture capital firms often focus in investing in innovative startups that offer high growth potential as well as a vision that they believe will succeed. They can also invest in slightly older companies that have proven results and are focused on boosting expansion.
Since they invest large sums into businesses, it is essential for them to believe that a high return will be yielded if successful. There is a lower possibility of investing in firms that lack aggressive plans for growth such as companies that prefer a slower and steadier path to business growth.
Homerun Nievera is the publisher of Negosentro.com and WorldExecutivesDigest.com. He has interests in several tech and digital businesses as director and chief strategist.