Funding Types and Sources for New Business Startups
Venture capital is a specific type of private equity funding that is provided by venture capital funds or private equity firms to startups, mid-stage, and new companies that have proven to have medium to high future growth or that have shown evidence of high financial potential. Typically, venture capitalists seek to provide seed money to young companies with the intention of using these companies as platforms for growth in new markets or areas where they may not currently be available or where there may be less competition. They may also use venture capital to acquire companies already available on the market that meet their threshold for value.
Unlike normal equity investments, venture capital funding does not require any payment or commitment from the startup prior to investment. In some cases, investors may provide seed funding to a company but then wait for an investor to purchase a substantial portion of the company. With no further commitment required, this results in an immediate cash flow boost to the company from the angel investor’s funding.
Investors who are solicited via a venture capital firm typically have an intention of purchasing a controlling interest in the company. This means that during meetings with a VC firm, they will present the company with business plans outlining their projected earnings and profits, as well as their plans for expansion. The VCs typically fund companies based on the projected numbers and revenue projection provided by the startups. Moreover, some venture capital investors are involved in the investment of many companies at one time. These investors tend to specialize in certain sectors such as energy, real estate, software, or technology.
Private Equity firms are another common source for venture capital. Similar to venture capital funds, they usually fund startups with the expectation of providing the company with an equity injection. However, like angels, there is usually no commitment required on the part of the angel investor or venture capital firm. It is important to note, however, that both these funding sources require written documentation from the startups detailing the expected income, business plan, and exit strategy.
Lastly, there are third-party investment groups such as Private Capital Foundations (PFF) and Commercial Investment Companies (CIC). They are often considered to be in the same investment category as venture capital firms. Unlike venture capital firms, PFFs are not generally solicited through angel investor networks. Rather, PFFs are funded by institutional investors, usually wealthy individuals. Unlike venture capital funds, PFFs are typically high-risk investments.
Regardless of which source of capital was used to source the startup funds for a given company, three basic funding levels remain consistent. Investors will almost always provide seed money, Series A, or B funding, or some combination thereof. The type of venture capital funding received from an angel investor, venture capital firm, or private equity group will depend on the type of business and industry the company is embarking on at this time. The companies can continue raising money based on their performance until their business is successfully launched and generating revenue. As a result, most new businesses will not experience significant debt funded by venture capitalists as their business matures and generates meaningful revenue.