About Venture capital

Venture capital

Venture capital (also known as VC or Venture) is provided as seed funding to early-stage, high-potential, growth companies and more often after the seed funding round as growth funding round (also referred as series A round) in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. To put it simply, an investment firm will give money to a growing company. The growing company will then use this money to advertise, do research, build infrastructure, develop products etc. The investment firm is called a venture capital firm, and the money that it gives is called venture capital. The venture capital firm makes money by owning a stake in the firm it invests in. The firms that a venture capital firm will invest in usually have a novel technology or business model. Venture capital investments are generally made in cash in exchange for shares in the invested company. It is typical for venture capital investors to identify and back companies in high technology industries, such as biotechnology and IT (Information Technology).

Venture capital typically comes from institutional investors and high net worth individuals, and is pooled together by dedicated investment firms.

Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience.

A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital (thereby differentiating VC from buy-out private equity, which typically invest in companies with proven revenue), and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one's investment in a given startup company. As a consequence, most venture capital investments are done in a pool format, where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format, the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm.

A venture capitalist (also known as a VC) is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

Venture capital is also associated with job creation, the knowledge economy, and used as a proxy measure of innovation within an economic sector or geography.

In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value).

Young companies wishing to raise venture capital require a combination of extremely rare, yet sought after, qualities, such as innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team. VCs typically reject 98% of opportunities presented to them[citation needed], reflecting the rarity of this combination.

Venture Capital - A source of business investment associated with a higher-risk opportunity than conventional financial institutions are willing to bear. In return for the higher investment risk, a venture capitalist usually expects some combination of equity ownership in the business.

Equity finance in an unquoted, and usually quite young, company to enable it to start up, expand or restructure its operations entirely. It's cheaper than bank finance initially because paying dividends can be deferred; it also provides a strategic partner - but it implies handing over some control, a share of earnings and decisions over future sales.

Venture capital (VC) is professionally-managed equity money (money for stock), that is repaid by capital gains through the sale of stock. Investors are typically short- to intermediate-term investors. With average investments well over $1 million, venture capitalists seek high rates of return by investing in high-risk, early-stage businesses. These businesses must demonstrate the possibility of extremely rapid growth. Typical companies have demonstrated sales, but are not yet profitable. Venture capital promotes economic development because it allows new ideas and technologies to become profitable, creating wealth and jobs.

These companies vary; some are privately owned, others part of major organisations. They typically consider investments between £1 million and £20 million

Venture capital is, strictly speaking, a subset of private equity and refers to equity investments made to fund the launch, early development or expansion of an unquoted, and usually quite young, company. Offsetting the high risk the investor takes is the expectation of higher than average return on the investment.

Wh­en you start a new business, you need money to get it off the ground. You need the money to rent or purchase space for the business, furniture and equipment, supplies, etc. You also need money to pay employees. There are several places where you can get the money that a new business needs:

• Personal savings -- you can fund the business yourself from savings or by getting a second mortgage on your home.
• Bootstrapping -- In some simple businesses, you can bootstrap the business. That means that, with a very small investment, you get the business going and then use the profits from each sale to grow the business. This approach works well in the service industry where start-up expenses are sometimes low and you don't need employees initially.
• Bank loan -- You can borrow money from a bank.

All three of these techniques have limitations unless you are already a wealthy individual. A fourth way to get money to start a business is called Venture Capital -- with venture capital you can sometimes obtain large quantities of money, and this money can help businesses with big start-up expenses or businesses that want to grow very quickly.

Venture capital has a number of advantages over other forms of finance, such as:

• It injects long term equity finance which provides a solid capital base for future growth.
• The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gain.
• The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations.
• The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners, and if needed co-investments with other venture capital firms when additional rounds of financing are required.
• The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth.

Entrepreneurs were the big winners in 2007, receiving more than $7 billion in venture capital a quarter for four straight quarters--a phenomenon not seen since 2001. Venture capitalists invested $29.4 billion in 3,813 deals in 2007, a 10.8 percent increase in dollars and a 5 percent increase in deal volume over 2006.

Every year we take the pulse of the VC industry to help you determine if now is the right time to seek funding. Our listing ranks VC firms by the number of early-stage deals made in 2007. We've also included a listing of later-stage funding firms.

Venture capital provides long-term, committed share capital, to help unquoted companies grow and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a business in which he works, turnaround or revitalise a company, venture capital could help do this. Obtaining venture capital is substantially different from raising debt or a loan from a lender. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business . Venture capital is invested in exchange for an equity stake in the business. As a shareholder, the venture capitalist's return is dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist "exits" by selling its shareholding when the business is sold to another owner.

Venture capital in the UK originated in the late 18th century, when entrepreneurs found wealthy individuals to back their projects on an ad hoc basis. This informal method of financing became an industry in the late 1970s and early 1980s when a number of venture capital firms were founded. There are now over 100 active venture capital firms in the UK, which provide several billion pounds each year to unquoted companies mostly located in the UK.

There are three different types of venture capital investment. Early stage financing includes seed financing, start-up financing and first stage financing. Seed financing refers to a small amount of venture capital given to an entrepreneur or inventor who wishes to start a business. It may be used to build a management team, for market research or to develop a business plan.

Start up financing refers to venture capital that is given when a business has been operating for less than a year. Their product will not have been sold commercially yet, and they will just be ready to start doing so. First stage financing is used when companies wish to expand their capital and to proceed full scale and enter the public business arena.

Another type of venture capital investment is expansion financing. This covers second and third stage financing and bridge financing. Second stage financing is an investment used to expand a company that is already on its feet. The company is trading and has growing accounts and inventories, although it may not yet be showing a profit.

Third stage financing is an investment to companies that are breaking even or becoming profitable. The venture capital is used to expand the business. It may be used in the acquisition of real estate or for further in-depth product development.

Bridge financing covers a variety of different meanings. It is a short term, interest only investment. It is used when company restructuring is taking place. The money can also be used if an initial investor wants to liquidate his position and sell his stock.

Venture Capitalist

A venture capitalist is a person who invests in a business venture, providing capital for start-up or expansion. Venture capitalists are looking for a higher rate of return than would be given by more traditional investments.

Generally, venture capitalists are looking for returns of 25 percent and up.

What's the difference between a venture capitalist and an angel investor?

A venture capitalist is a professional investor. He or she manages a fund and is looking for suitable investments for that fund. An angel investor is an individual who, while also looking for a suitable investment, is also looking for a personal opportunity.

In other words, the venture capitalist may have no business experience applicable to the industry your company is involved in, and is focused on the potential rate of return your company can provide. An angel investor often has business experience relevant to your company and is interested in adding value to your company, as well as making a return on his or her investment.