A new business calls for sufficient capital investment for a successful market launch. A capital investment will facilitate the purchasing of business space, equipment and supplies for your company, while also taking care of employee wages. You can secure capital investment towards your business from personal savings, or use profits from your business to fund business growth, or apply for a bank loan. All three techniques however, have limitations, and unless you are already wealthy, none of these methods are the most feasible options for new business ventures. The other alternative is to apply for a venture capital investment and obtain the required money for your new business. Venture capital investments are designed to suit your needs, whether your business involves huge start-up expenses or promises rapid growth.
What is Venture Capital?
Elaborating simply, venture capital (also called VC or Venture) is capital investment or a type of private equity provided to young, high-potential growth businesses and companies by professional business investors. Usually, venture capital investments are made towards businesses involving high technology markets like information technology or communications, and ideally such companies that employ innovative business strategies and show promise of generating great profits, and securing good returns for venture capital investors. A venture capital investment is pivotal to a company in its early stages, and is generally provided as cash investments in exchange for company shares.
Who Can Apply for Venture Capital?
Venture capital is an attractive form of private equity for:
- Companies with limited operating history
- Companies too young or small to apply in capital markets
- Companies without sufficient market recognition, expertise or value, unable to secure bank loans for business growth
- Companies unable to complete their debt offering
Venture capital investments involve high risks. Most Venture capital investments therefore, are made in less mature and smaller companies. While this allows venture capitalists to establish significant control over the company’s management, decision making and business policies, and obtain a part of the company’s ownership, it also proves highly beneficial for the company’s development. A venture capitalist’s professional expertise ensures that businesses see rapid growth and inspiring profits.
Young businesses applying for venture capital investments require a combination of the following qualities:
- A well-developed strategy for new business ventures.
- Rapid-growth potential
- Advanced, innovative and leading-edge technology for business
- A management team with impressive market experience, business training and ability to come up with fresh and creative business models
Unfortunately, most companies fail to fulfill the above requirements. As a result, 98% of the applications for venture capital opportunities are rejected by venture capital firms.
Who are Venture Capital Investors?
Venture capital investors, also known as venture capitalists, are typically wealthy individuals, or an association of high net-worth investors supported by technical and managerial expertise.
Venture capitalists contribute their finances, also known as venture capital funds, to dedicated venture capital investment firms. Venture capital firms, holding funds from investors are organised as limited partnerships. The capital is reserved for investment in companies that promise high returns in five to seven years.
Venture capital firms employ small teams of professionals with industry experience and business training, who add expert value to investment decisions. Investment decisions generally involve venture capital investments to small, yet promising companies, who were rejected as potentially risky ventures for standard bank loans or capital markets.
The role of venture capitalists is to:
- Offer financial assistance to young and fast growing companies
- Purchase equity securities for the company
- Offer expertise and ideas for the development of creative products and value services
- Actively participate in company management and production
- Encourage high business risks to fulfil expectations of higher profits
- Offer businesses a long-term association and orientation for success
If you are considering applying for venture capital, you must carefully screen the business merits of the venture capital firm you plan to deal with. Venture capitalists will typically invest small amounts in businesses with long-term prospects. Venture capital firms will also actively involve themselves with the company’s management.
How Venture Capital works
The core skill exercised by Venture Capital investors is the ability to identify those businesses that have potential for rapid growth. This also means generating high financial returns for the investors in the early stages of a business.
Venture capitalists also take up entrepreneurial roles in a company’s management at its nascent stage. This adds tremendous expertise to the company’s management, business ventures, policies and decisions, and helps realise higher returns. Direct involvement with the company differentiates venture capitals from buy-out private equity, which involves investments in a company against proven profits or revenue generation.
Involving a venture capitalist in a company’s management means associating with job creation and innovative business techniques, market knowledge and expert measures for a successful business. A venture capital investor will usually aim towards business advancement, higher profits and reaping greater benefits from businesses during their early stages of operation.