Types of Venture Capital Funding
Venture capital is also known as private equity or venture capital. Venture capital is money from venture capital companies or funds to startups, mid-stage, or emerging companies that are deemed to have great potential for growth or that have proven a great success. Investors typically fund this type of financing with the expectation of gaining a return on their investment within a year to two years. Typically, venture capital funds provide this type of financing in the form of shares of a company’s stock. The initial funding is usually made by angel investors, other private investors, or venture capital firms.
An angel investor is a person who has an individual investment or portfolio of investments that he or she is willing to lend to an entrepreneur or a small business. Angel investors typically have no real tangible information about the business, except that they believe the business will be profitable. They do not require the businesses specific documents or information, such as business plans. As a result, there is much less risk for both the venture capitalist and the angel investor. However, the risks for both can be amplified if the company does not survive the first year of operation.
In contrast, venture capitalists are wealthy individuals who typically have extensive experience in business. They are typically affiliated with some successful businesses or corporations in the past. Because of their investing experience, they are able to identify strong businesses that have potential for growth, as well as the need for additional financing. Most venture capitalists will provide the necessary seed money and /or a line of credit depending on the individual investor’s terms and conditions. However, because of their more intimate knowledge and involvement, they tend to charge higher than angel investors for the same amount of funding.
There are many different types of venture capitalists. There are bankrolled ventures, which are funded by a bank loan and are managed by a senior financial officer of the company. There are private investors such as individual entrepreneurs, companies, institutions, investment groups and other groups of people, who pool their money together to fund new and innovative small businesses.
Angel Investors. Angels make up a large percent of venture capital investors. They invest their own money in a business but may solicit venture capital from other investors. Typically, they have experience and/or money with which to work; they usually invest large amounts of money, but they are more likely to take a risk in new businesses that they do not know anything about.
Private Equity. There are also private equity firms. These firms are usually smaller than venture capital firms, but they still have significant resources. The primary difference between the two is that private equity firms invest in larger companies, whereas venture capital firms invest in many smaller companies. In general, private equity firms focus more on the long-term success of a company and do not have a lot of short-term investments.