What is Venture Capital?
Venture capital is a risk capital that provides financial support to high-growth businesses. The essential function of venture capital is to fund start-ups by giving them substantial amounts of money with the potential for high financial returns. Venture capitalists often focus on companies with innovative concepts and new technologies.
Who are Venture Capitalists and How are they Relevant to Start Ups?
Venture capitalists or “founders of tech start-ups” are typically wealthy individuals who use their own personal funds to invest in tech start-ups –usually with the intent to sell their stakes at a high return at some future time. Founders of tech start-ups may be engaged in the business of purchasing ventures, or they may prefer to act as consultants rather than investors. The terms “venture capitalist” and “founder of tech start-ups” are typically used interchangeably in this context. The term “venture capitalist” is most commonly applied to individuals who are involved in the earlier stages of establishing businesses, when the stakes invested are generally higher, and where significant hurdles must be overcome in order to launch viable companies. Venture capitalists who invest in established public companies may be called “non-executive directors.” Other, similar terms include venture capitalist, venture capital investor or simply “VC.”Venture capitalists share many traits with investment bankers, but it is rare for an investment banker to do venture capital investing.
Venture investors perform a number of functions by participating in the financing and management of various businesses. The financing of new businesses typically occurs in several rounds. An initial round of financing is called the “seed-funding” round. As businesses grow, they may be subject to additional funding rounds with different series of preferred stock (i.e., Series A Preferred Stock, Series B Preferred Stock, etc.).
The benefits of venture capital investing include potentially large rewards when an investment in a young company is successful. Venture capitalists typically invest when the business is still in its early stages and can be influenced by the founders or management team in terms of its direction and management. However, because of the inherent risks involved in investment in fledgling companies, investors typically put sizable amounts of capital at risk in exchange for an equity stake in the business. As a result, venture capitalists often play active roles in the management of their investee companies by sitting on their boards of directors and exercising varying degrees of control over management decisions.
Venture Capital Vs Private Equity
Venture capital is distinct from private equity (also called buyout financing) which refers to taking a company public using either an initial public offering (IPO) or through mergers or acquisitions (M&A). The sub-prime mortgage crisis has prompted increased regulatory scrutiny into how private equity firms manage funds.
The primary difference between venture capital and private equity is that venture capitalists generally prefer to invest in businesses that are still in their early stages, when the risks are low. They provide financing by providing the firm with debt financing (i.e., leveraged loans) in exchange for equity in the company. Private equity is focused on mature companies when companies are already highly profitable and not looking to expand or enter new markets.
Types of Venture Capitalists
- Angel Investors – These investors tend to come from small businesses, so they’ll give their money and time to help these companies grow. Usually, these investors will give much less money than other investments and they won’t expect as much in return, but they still want the best returns possible.
- Private Equity Investors – Private Equity Investors are similar to Angel Investors, but they have more money available to them. These investors aren’t looking for high returns on their investment, but they don’t want to lose all of their money either.
- Hedge Funds – Hedge Funds are mainly concerned about the rate at which their investments are growing, so they’re going to want a lot of growth over a short period of time. These are considered riskier investments since the investor is expecting more in return for taking on more risk.
- Venture Capitalists – Venture Capitalists are different from other types of investors because they’re willing to give higher amounts of money and take on more risk than other types. They’re willing to take a lot more risk because they know they can make more money if their companies do well.
- Government – The government puts a lot of restrictions on most business, so most business owners will look for outside investors to help them with these restrictions. There are different government agencies that handle this, such as the Small Business Development Centers and the SBA loans, but sometimes there aren’t enough funds available to provide help. Even if you need help from these agencies, it’s not guaranteed that they’ll put out any money. So, you need to know what your company is worth and how much revenue it can bring in before you approach them for funds.
Types of Venture Capital funds:
Pre-Award: This type of money is given to a business before they start getting Venture Capital. For example, if your company starts out with $100k and needs $10k in order to place an order for their product. You could ask for the money from the investor who helped you already (who would give it to you), or from other investors who trust your business plan. This can be used to help your company grow.
Post-Award: This type of money is given to you after you have already gotten Venture Capital. This money can be used for anything, including working capital, expanding the company, being able to pay for certain parts of the business plan while waiting on your actual venture capital investment to come in. Post-Award is usually more expensive than pre-award because it’s usually the only way that the company will get additional funding. Upon getting Venture Capital, it’s important that your company pays out this post-award money until it has enough cash on hand (otherwise they’ll lose this money) and then uses it towards their venture capital investment.
How do Venture Capitalists find new investment opportunities?
Fintalent’s capital raising experts have vast experience in helping Venture capitalists identify new investments and promise to help businesses position themselves adequately for Venture Capital funding. Venture Capitalists can be found all over the place, but they’re mainly located at universities that have business programs, financial centers like banks and private companies, and sometimes even large businesses.
In order to attract the attention of a Venture Capitalist, you need to have a solid business plan. Usually, Venture Capitalists want to invest in a solid business that is already making money. Having a successful company with a promising future can be very attractive to investors.
Even if you do have a good business plan, it may still be hard for Venture Capitalists to find you. You need to identify what’s going on in your industry and keep track of any companies doing well. If they seem like they’re on the verge of growing out of control, then this could be very interesting to Venture Capitalist who are looking for new investment opportunities. This idea is more important for smaller businesses that are just starting out.
If your company does have a good business plan and you’re able to demonstrate that you have a strong future, then there are going to be a few different types of Venture Capitalist who will be interested. It’s important for you to know these people so that you can figure out what kind of investor would be best for your situation.
Venture capitalists are often categorized as either “Secondary Market” or “Primary Market” based on the sources of their financing. Secondary VCs provide many types of credit to companies operating in the market. The credit can be used in a variety of situations, including acquisitions, equipment purchases, liquidity needs, early stage financing and working capital. Secondary market companies raise funds through equity sales to national or regional investors through private placements, or to institutional investors in the form of publicly traded stock. This is in contrast to primary market VCs which are focused on startup capital investments in new ventures.Secondary venture capitalists may include mutual-funds, insurance companies, pension funds and banks or even other VC firms that are focused on later stage private companies.
How Fintalent Can Help You Position to receive Venture Capital Funding
Fintalent’s consultants comprising Investor Pitch Deck Specialists, Series A experts, Seed Round Consultants, as well as our Funding Strategy Experts have the best advise on how businesses and startups can position themselves to receive VC funding. According to Fintalent consultants, it’s important to have a solid business plan and a good idea before you approach any investor. This way, you can show Venture Capitalist that your company already has a real potential for success and that it won’t just get taken over by bigger companies that can get Venture Capital faster.
The more prepared you are when you go to investors, the better your chances of attracting them. The best thing to do is take notes about everything so you know what their response was going to be. This will help build a good rapport with them and lead to a positive future collaboration between your company and these investors.
Because Venture Capitalists want to find solid, growing companies, you need to learn your industry inside and out. If you play your cards right, you can attract Venture Capitalist who are looking for some explosive growth in some industries or even some new ideas.
One of the most important things Venture Capitalists want is loyalty. This means that they want to know that these companies will stick with them through thick and thin. They don’t just want to take on a company that’s already making money if it can become even more successful than it is now. Usually, there are two types of people who start new ventures:
- Visionaries – These people have a great idea and they stick to it.
- Movers and Shakers – These people aren’t afraid to change their ideas or to take on other ideas in case their previous hasn’t worked out.
While these two groups of people can both do very well, the movers and shakers will be much more attractive to Venture Capitalists looking for solid investment opportunities.
Finally, you should always remember that Venture Capitalist aren’t just giving money away. They expect a return on their investment and they’re going to want their money back with interest, so you need to manage this properly.