Venture capital (VC) is financial capital
provided to early-stage, high-potential, growth startup companies. The venture
capital fund earns money by owning equity in the companies it invests in,
which usually have a novel technology or business model in high technology
industries, such as biotechnology and IT.
capitalists (VCs) represent the most glamorous and appealing form of financing
to many entrepreneurs. They're known for backing high-growth companies in the
early stages, and many of the best-known entrepreneurial success stories owe
their growth to financing from venture capitalists.
provide large sums of money, advice and prestige by their mere presence. Just
the fact that you've obtained venture capital backing means your business has,
in venture capitalists' eyes, at least, considerable potential for rapid and
loans to--and equity investments in--young companies. The loans are often
expensive, carrying rates of up to 20 percent. Many venture capitalists seek
very high rates; a 30 percent to 50 percent annual rate of return. Unlike banks
and other lenders, venture capitalists frequently take equity positions as
well. That means you don't have to pay out hard-to-get cash in the form of
interest and principal installments. Instead, you give a portion of your or
other owners' interest in the company in exchange for the VCs' backing.
is that often you have to give up a large portion of your company to get the
money. In fact, VC financiers so frequently wrest majority control from and
then oust the founding entrepreneurs that they are sometimes known as
"vulture capitalists." But VCs come in all sizes and varieties, and
they're not all bad.
capitalists typically invest in companies they anticipate being sold either to
the public or to larger firms within the next several years. Companies they
will consider investing in usually have the following features:
Rapid, steady sales growth
A proprietary new technology or dominant position
in an emerging market
A sound management team
The potential for being acquired by a larger
company or taken public in a stock offering
addition, venture capitalists often define their investments by the business'
life cycle: seed financing, start-up financing, second-stage financing, bridge
financing, and leveraged buyout. Some venture capitalists prefer to invest in
firms only during start-up, where the risk is highest but so is the potential
for return. Other venture capital firms deal only with second-stage financing
for expansion purposes or bridge financing where they supply capital for growth
until the company goes public. Finally, there are venture capital companies
that concentrate solely on supplying funds for management-led buyouts.
several types of venture capital:
Private venture capital partnerships are
perhaps the largest source of risk capital and generally look for businesses that have the
capability to generate a 30 percent return on investment each year. They like
to actively participate in the planning and management of the businesses they
finance and have very large capital bases--up to $500 million--to invest at all
Industrial venture capital pools usually
focus on funding firms that have a high likelihood of success, like high-tech firms or companies using state-of-the-art
technology in a unique manner.
Investment banking firms traditionally
provide expansion capital by selling a company's stock to public and private equity investors. Some also have formed their
own venture capital divisions to provide risk capital for expansion and
to contact venture capitalists is through an introduction from another business
owner, banker, attorney, or other professional who knows you and the venture
capitalist well enough to approach them with the proposition.
entrepreneur is tough. Having your startup make it past year one is even more
so and generating revenue can at times seem next to impossible. So, for those startups that have successfully gotten over these humps and
made it look easy.
additional encouraging news for aspiring entrepreneurs on many fronts, just in
case you are thinking about joining the existing ranks:
of successful startups have hit
an all-time high.
Public Offerings (IPO) are back as an exit strategy.
for early-stage startups is more available than ever.
4. Cost of
entry for a startup is at an all-time low.
incubators and accelerators are popping up everywhere.
6. The world
is a now single market, both homogeneous and heterogeneous.
media is a boon for entrepreneurs and startups.
corporations have lost their ability to innovate.
Baby Boomers are joining the fun in record numbers.