What is Venture Capital?
3 min read
Venture capital is financial funding provided by investors, financial institutes, and investment banks for startup and established companies and businesses.
It is the type of private equity and financing that is provided by the investors to the businesses in which they see strong growth potential. It is not mandatory that venture capital be provided in the form of finance; it can also be provided in the form of managerial and technical expertise to help the people in the growth of their company.
The focus of venture capital is on small companies that have exceptional potential for growth, and companies that are looking to expand themselves. However, the financial investment in the startup business can prove to be risky for investors. The venture capital is becoming popular among the companies that are newer and have less than two years operating history. An essential source of fundraising is more likely when they do not have access to the bank loans and capital market. Venture capital usually gets higher return rates than other investments like the stock market because they invest in businesses that have rapid growth potential. Still, it also brings a high rate of risk. Newly established companies mostly use venture capital, but it is also used by established companies looking to expand their business, and fulfil the need for additional expertise.
High risk = High reward.
Venture capital is the long-term investment of five to eight years in businesses. This time is given to startup businesses to grow to reach a valuable equity point eventually, and the company gets recognition among the public. Venture capitalist typically request 25% or more in shares for their return on investment, keeping in mind the risk ratio of the business they have invented. The venture capital firm or organisation gets the financial investments from the insurance companies, pension funds, well-off investors and people who are willing to invest in venture capital. After that, the venture capital firms identify and make the decision about which business should be selected for the investment and then decide the percentage of profit and management fee as reimbursement.
Rodney Adler is one example of a venture capitalist in Australia, he has been a venture capitalist for over 40 yea
rs now. He is always open to new ideas and willing to help however he can, thanks to his wide array of experience. You can actually read an article here about real companies that he has helped out in this way.
For the security of their investment, the venture capital firm plays an active and responsible role in all important management decisions. When there are issues like a company sale, major business expenditure and additional financing, the board members of the venture capital firms are responsible for exercising the veto right over such issues. The typical venture capitalist is very selective about the business that they pick for the investment. It is recognised that startup businesses are less likely to get the attention of the venture capital, and they are unable to raise their funds. Still, if your business has passed the startup stage and has valuable products and services, then you are a better option for them. In that kind of scenario, it reduces risk for investors, due to the ability to see products and public reactions to them. This is the main reason that the majority of businesses do not qualify for financial funding by venture capital. The venture capitalists are always in search of the fastest-growing companies because they can expect a tremendous rate of profit from them. In contrast, they do not always prefer small businesses, as it is risky and can be less profitable.
Most people confuse venture capital with a loan, although both are deemed to be similar methods, they are far more different from each other than you might think. When we talk about a loan, it is the kind financial support a business owner takes from the lender, and after some time, the company has to return that actual money of loan with interest. However, venture capital is more like a private share in the company, and it is like a partnership between the company and the investor.
