Venture Capital Investors
Venture capital is a type of private capital financing which is provided by venture capital funds or companies to early-stage, startup, and emerging businesses that have been deemed to possess high probability of success or that have shown evidence of high profit potential. Venture capitals are usually provided through a third party investor who buys part of the stake or has an interest in a given company. These investors typically have a minimum investment amount, although it varies depending on the type of venture capital that one chooses to fund. The most common type of venture capitalizing includes angel investors, although there are also some sole proprietorship entities and family members who may provide venture capital to a given business. Some venture capital funds invest directly in the company, while others fund the company indirectly via various intermediaries such as lawyers, financial advisors, consultants, suppliers, and other third parties.
A venture capital investment typically consists of two parts: capital for working capital and seed money for start-up. In the former, companies receive a down payment from the venture capital firm, with the balance due immediately upon signing an agreement. The money can then be used for accounts receivable and inventory, and for any general costs that the company incurs. Seed money, on the other hand, is paid to the company before its proceeds from its sale are disbursed to investors.
In addition to providing seed money for startups, venture capitalists also commonly provide Series A and Series B financing for new companies. Series A funds are offered to startups that have not received any investment from a venture capitalists. Series B funds are available to companies that need additional investment but have not yet received approval from a venture capitalist. Usually, these are companies which are in distress or have not raised any cash from investors.
Ventures funding can be done through a variety of ways. A few venture capital firms engage in’straddle’ transactions, where they will finance a startup through one firm, while simultaneously funding another through another firm. In the worst case scenario, a third party does not participate in the financing, in which case the venture capital firm has nothing to lose. However, most firms fund through a series of transactions. One of the first transactions is typically a ‘leverage’ transaction, whereby a firm reimburses a venture capital firm for acquiring it. This is referred to as a “straddle,” and is typically an attractive option for high risk ventures.
Venture capitalists have an immense amount of experience investing in new companies, which allows them to make informed decisions regarding which businesses will fail and which will succeed. Because of this, venture capital firms often only fund new companies whose management has the best financial and business management skills. This also means that most new companies are not backed by substantial numbers of venture capitalists. There is also some risk associated with investments in new companies. Venture capitalists take a large risk in speculative ventures, as their investment is not entirely assured.
Because venture capitalists typically have a long history of high risk investments, they generally require a significant amount of capital, which may be as much as 100%. While venture capitalists may have a great deal of experience investing in new businesses, they also generally require a sizeable amount of capital to make these investments. In many circumstances, private equity capital and venture capital investments are referred to as “private placements.” While both types of financing may be highly effective, the later is considered a more reliable source of capital.