Definition of Venture capital:
Venture capital is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. However, it does not always take a monetary form; it can also be provided in the form of technical or managerial expertise. Venture capital is typically allocated to small companies with exceptional growth potential, or to companies that have grown quickly and appear poised to continue to expand.
Startup or growth equity capital or loan capital provided by private investors (the venture capitalists) or specialized financial institutions (development finance houses or venture capital firms). Also called risk capital.
Venture capital is a type of funding for a new or growing business. It usually comes from venture capital firms that specialize in building high risk financial portfolios. With venture capital, the venture capital firm gives funding to the startup company in exchange for equity in the startup. This is most commonly found in high growth technology industries like biotech and software.
A person who deals in venture capital is a venture capitalist, and usually works for a venture capital firm. The firm typically has one or more investment portfolios that are owned by a limited partnership. The venture capitalist is often a general partner in the portfolio, and individual investors or other institutions (particularly university endowments and pension funds) are limited partners in the limited partnership. Venture Capital vs Loans
Although loans and venture capital are both common methods for funding businesses, venture capital is very different from a loan.
With a loan, a lender gives a company money, and the company has a contractual obligation to pay back that amount plus interest over some period of time. Sometimes the loan is backed by assets (like equipment or inventory) or receivables. In the case of many small businesses, the loan is backed by a personal guarantee from the business owner. This backing allows the lender to recoup some of its investment in case the lendee defaults (fails to make payments)
With venture capital, the startup company issues private shares in exchange for money. The venture capitalists partnership fund actually becomes a partial owner of the startup. Additionally, venture capital is usually only used with high growth industries, where risk is much higher. In these cases, there are little or no assets to back the loan in the event of default so the likelihood of obtaining a loan is much lower, and the potential payouts must be drastically higher to result in a successful investment. Venture Capital vs Angel Investing & Seed Financing
The primary differences between VC vs seed & angel investing are timing in the companys lifecycle, monetary size, and deal structure.
Timing. Venture capital is typically not used for extremely early funding. Instead, these rounds are often called Series AA, or Pre-A rounds, and include funding from friends & family, angel investors, and seed stage financing syndicates and firms. Venture capital firms usually get involved at the Series A round and after (all happening after the AA or Pre-A rounds). Although both VC and seed/angel investing are high risk investments, seed & angel investing usually happen in the earliest stages of a startup when the risk is ultra-high.
Funding Amounts. Venture capital also usually starts with companies that are slightly more mature (although not necessarily profitable), with higher valuations, and higher funding amounts. Funding amounts in angel & seed investing typically range from a couple thousand USD through to one million USD, while venture capital is usually millions, tens of millions, or even hundreds of millions of dollars.
Deal Structure. Angel investing also frequently uses different deal structures than VC, although this is primarily to reduce legal costs, cut transaction overhead, and rapidly accelerate the rate at which the startup and angel investor can agree on terms. Some of these alternative structures include convertible notes and SAFEs (simple agreement for future equity). Unlike venture capital, convertible notes and SAFEs dont actually transfer equity in the company to the investor until a later date, and in the case of failed startups, sometimes not even at all. Venture Capital vs Crowdfunding
The primary difference between venture capital and crowdfunding is simply equity. Venture capitalists acquire equity in the startup. Crowdfunders do not. Instead, crowdfunding is much more like a high-risk pre-order platform, where theres a reasonable probability that the startup may fail to deliver the pre-order.
Capital invested in a project in which there is a substantial element of risk, typically a new or expanding business.
Though it can be risky for investors who put up funds, the potential for above-average returns is an attractive payoff. For new companies or ventures that have a limited operating history (under two years), venture capital funding is increasingly becoming a popular – even essential – source for raising capital, especially if they lack access to capital markets, bank loans or other debt instruments. The main downside is that the investors usually get equity in the company, and, thus, a say in company decisions.
How to use Venture capital in a sentence?
- Sometimes a company will see the profit potential in another company and give them the venture capital they need to get started.
- It has evolved from a niche activity at the end of the Second World War into a sophisticated industry with multiple players that play an important role in spurring innovation.
- The fastest way to grow your startup from scratch is to get an angel investor to provide the venture capital you need to get set up, without risking your own money.
- Venture capital financing is funding provided to companies and entrepreneurs. It can be provided at different stages of their evolution.
- It has also been suggested to allow mutual funds and pension funds to invest in venture capital funds.
- The man pitched his idea to business men in order to gain venture capital to expand his small but promising business.
Meaning of Venture capital & Venture capital Definition