Venture Capital – What it is and How it Works?
Venture capital is essentially a type of private equity financing which is given by venture capital firms to emerging businesses, early-stage, or growing companies who have been deemed to possess high potential for profitability or that have shown consistent growth over a period of time. This financing is provided in exchange for shares of the business. Venture capital financing is different from the equity financing in that the equity investors are entitled to vote as a voting trust. This means that the investor’s ownership interest will be altered annually according to a set of predetermined, publicly stated, minimum numbers of shares.
The equity funds that are part of venture capital firms are usually provided through bank loans or credit lines from banks or other lending institutions. These lending institutions may also arrange for private equity transactions between private equity firms and end users. In some instances, venture capital funds may originate from existing financial sponsors such as venture capitalists or venture capital investment groups, private equity funding entities, or wealthy individual investors.
Many venture capital funding activities are carried out on an as-is basis which means that, although there are milestones agreed upon in the investment, the final cost and expense of the project is borne by the company making the investment without any expectation of returns. For this reason, it can be said that this form of financing is similar to buying a used car without any guarantee of resale price. Many investors prefer to fund early-stage companies through this means because they do not have to bear additional costs in case the company makes profits later on. Investors can carry out this type of investment in a number of ways. They may choose to make an outright investment through a private placement of securities where they are the only ones who have a stake in the company.
Another popular method of venture capital funding comes in the form of pension fund investment. Venture capitalists provide pension funds with the money they need for start up costs or expanding a current business into new markets. Since most corporate pension plans are not yet fully funded, venture capitalists may provide funding levels earmarked specifically for such purposes. If a company is generating a profit, then the level of investment may be raised accordingly.
Private equity funding can be achieved in a number of ways. A private equity syndicate is one example where a collection of investors pool their money together in order to finance a given business. In another case, venture capitalists may fund the start up costs of a company in return for shares in the business. Usually, these shares are referred to as “dividends”. Venture capitalists usually prefer to fund start ups that have the potential to produce large profits in a reasonably short period of time.
Angel investors are a relatively new breed of investment in small businesses. However, they are a great resource when it comes to securing venture capital for small businesses because they typically have access to large amounts of capital. Additionally, angel investors are usually highly successful entrepreneurs with high net worth. Unlike venture capitalists, angel investors do not usually expect to receive a return on their investment. Usually, they will invest their own personal capital in order to ensure that the business succeeds.