Venture Capitalists and Private Equity
Venture capital is a type of private capital financing which is offered by venture capital funds or private equity firms to budding, early stage, and established companies that have been considered to have excellent growth potential, or that have shown exceptional growth in one or more of their market segments. The term venture capital, as used in this context, refers to the money invested by an outside owner into a company, the amount of which is typically based on an initial investment of around 50%. Ventures that generate revenue are not considered venture capitals. They are, in essence, private placements. The purpose of this distinction is to help facilitate discussions between potential investors and the venture capital firm.
Venture capitalists offer funds only to those companies with which they have a relationship. In general, they will provide funding levels that reflect their overall investment risk. This means that, at the same time as they are providing seed funding, they will withhold a percentage of the profits that result from the company’s revenue stream. During this period, the venture capitalists wait for the revenue levels to justify their investments. Once sufficient profit has been generated, they will participate in the funding process.
Private equity firms generally seek to invest in high-growth but low market risk companies. These businesses typically need capital growth to create a large market share, to make an acquisition, or to fund an initial public offering. High-growth businesses are also considered less risky than other businesses, which allows them to be included in venture capital funds with lower risk levels. Some venture capital funds do not specifically invest in high-growth companies; rather, they seek to create companies that generate a high return on their investment, thereby generating strong overall returns for investors.
In the early years of venture capital investment, most investors were wealthy individuals with long lasting portfolios. Gradually, this type of investor was replaced by institutional investors who have a history of making safe investments with good results. The advent of new companies and the ability to finance new companies quickly via credit facilities provided investors with an adequate source of capital to continue growing new businesses.
A venture capital firm typically seeks to support new companies with adequate amounts of equity coupled with financial backing from accredited investors. Typically, the venture capitalist will provide money to a company so that it can meet its liabilities and obligations, while generating future capital gains through future sales and profits. If the venture capitalist is invested in a company that generates a significant amount of cash flow, the firm may provide investors with shares of that future cash flow. However, this usually only occurs when the company has first established a sufficiently robust financial base.
Venture Capitalists typically have very successful track records with creating successful new businesses and with growing established ones. They also tend to focus their investments on relatively untapped markets. Venture Capitalists typically fund early-stage companies, which tend to generate the greatest profits during the earliest stages of development. For example, if an investor wants to invest in a new small aircraft company, the venture capitalist will likely invest in the company if it has not yet produced a product that can compete with existing airlines. Smaller aircraft companies typically require substantially less initial financing to get started than larger ones, and therefore they require a lower level of risk. These are some of the factors that make venture capital very attractive to private-equity investors.