Home » Personal Blog » Investing » What is Venture Capital?

What is Venture Capital?

Listen to Audio
Voiced by Amazon Polly

Business Ventures are usually driven by innovation and invention. The business venture is a small start-up that is created with hope and a plan for generating revenue.

Most business ventures are small scale start-ups that commence with small investments. At sooner or later stage these business ventures require funding to develop and expand in the market. Finance is a very crucial aspect of any business venture.

This is where venture capitalists step in. They provide financing to such small start-ups and businesses that have long-term potential to grow, progress and expand. This financial aid provided by investors is called. These venture capitalists may comprise of single investor or group high net worth people or investors who pool their finances together through investment firms. Generally, venture capital is confused with angel investors.

Why is Venture Capital Important?

  • For companies and small scale start-ups who cannot access loans or finances from capital markets, venture capital becomes a significant source of funding.
  • They provide additional resources to the firms. They support firm in complex matters like legal, personnel and tax matters which is an important key factor in a growing young company. Some venture capitalists like Business Growth Fund (BGF) also provide proper infrastructures to the firm.
  • Venture capitalists have connections throughout the business industry and these connections can be of tremendous benefits for the firms.
  • It reduces the bridge between traditional funds and innovation funds.
  • Apart from investment, venture capitalist also provides guidance, mentoring and technical advice. Some venture capitalists have different teams of personnel who provide their expertise in various spheres of the organization apart from the financial sector.

How Does Venture Capital Work?

Venture Capitalist invest money that they pool from various other resources like other investment companies, pension funds, large corporations, etc. Venture capitalists generally get returns in the form of carried interests and management fees. Management fees refer to the percentage of the total amount of funds that they have invested for management. These are usually around 2% to 3% out of total capital invested. Carried interest is nothing but a percentage of profits made by the firm. It can range from 20% to 35%. This percentage may increase if venture capitalist firm belongs to top tier strata like Sequoia, Kleiner Perkins or Accel.

Venture capitalists usually ask for direct involvement in the firm to stay close by their investments and have a major role in decisions which can affect their returns. Therefore, many times venture capitalist may tend to buy 15% to 20% equity in the firm. Usually, if everything goes well venture capitalists take 5 to 7 years to exit.

Difference Between Venture Capital and Angel Investors

Venture capital is generally provided by banks or investors to firms having long-term growth potential. They invest money that they collect from other resources. Apart from providing financial aid, venture capital also provides guidance, technical advice, mentoring and sometimes even infrastructure. Venture capitalist tends to invest more money when compared to angel investors as they have direct say in the proceedings of the firm.

On the contrary, Angel Investors are individuals with high net-worth or group of investors at a venture capital organization known as National Venture Capital Association who invest together in companies with long-term growth potential. They invest their own money, unlike venture capitalists.

The Process of Acquiring Venture Capital

The process of acquiring venture capital may take anywhere between 6 months to a year or even more. First, if you aim to obtain venture capital for your start-up or business venture you need to identify suitable venture capitalist in your vertical that may invest in your firm. There are many tools which help you to identify VC that is most suitable for you. For example, you can use tools like  Mattermark, CB Insights, Venture Deal or Crunchbase.

Once you have a list of venture capitalists that may be interested in investing your firm you need to introduce yourself through firms that have already given great returns to the targeted venture capitalists. These introductions act like social proof and seal of approval. With better introduction chances of getting funded are higher.

If the investment firm is interested, next you may have to satisfy all their queries regarding your business plans, business model, products, administration, and management, etc. The investor may also perform a thorough investigation of the same. In case they are satisfied with overall results, you will receive a term sheet which promises to provide you with necessary funding.

Once you receive a term sheet, you are good to move ahead with due diligence proceedings which can take 1 to 3 months to be completed. After the completion of this process and signing and executing the necessary documents, you are ready to receive the funds in your bank account.

Who Should Opt for Venture Capital

  • You should go for capital venture funding only when you have invested in your firm and need extra funds to support it.
  • When you can no more afford innovation funding.
  • When you are ready to attract a pool of investors and enter a real market full of competitors.
  • When you are ready to expand your business strategically.
  • When you require proper finances, networking and mentoring.

When to Avoid Venture Capital Funding?

  • When you haven’t invested your own money into your firm.
  • When you have not researched other source for innovation funding like friends, connections, and families.
  • You don’t want direct involvement of investors in your company’s decisions.

Mistakes to Avoid While Raising Venture Capital

  • Avoid failing to answer queries of venture capital and provide them with satisfying solutions.
  • Instead of contacting all available venture capitalists, reach out only to those who share a connection with you.
  • Boasting and exaggerating about the status quo or success of the firm.
  • Revealing a firm’s net worth in the initial stages.
  • Avoid short-term planning and have a long-term outlook when planning venture capital.
Author Bio: Stacy Thomas is a freelance writer who has been writing for various blogs for the last few years. In this post, he has written about the benefits of Social Media Marketing, Business, Finance as well as the features related to the same.

Check Also

Buy Altcoins like DasCoin1 310x165 - 7 Steps You Need to Know before Buying Bitcoin

7 Steps You Need to Know before Buying Bitcoin

Listen to Audio Bitcoin mania does not seem to be waning. People are taking loans …

Do NOT follow this link or you will be banned from the site!