Know About Venture Capital and How it Work?
(VC) Venture Capital is a type of financing or private equity that financiers offer to small businesses or companies that have the potential to achieve long-term growth. It mostly comes from financial institutions, investors, and investment banks. Moreover, venture capital is not just about money or investments. It can also be a managerial know-how and technical assistance. This kind of investment is solely for small businesses with extraordinary potential.
- VC is a type of private equity or funding that is offered to entrepreneurs and startups.
- Venture capitalists offer finances, technical assistance, or managerial experience to businesses.
- Venture capital can be offered at various stages of their development, even though it involves initial and seed round financing.
- VC funds achieve mutual investments in high growth chances in new businesses.
- VC grew from a particular movement at the end of WWII.
What is Venture Capital (VC)?
As mentioned above, venture capital offers investments to new businesses and startups that stakeholders think have immense growth potential. This funding comes in the form of PE (Private Equity). It can also come in the form of managerial expertise and technical assistance. In return, they get a sharing in the company in any form. VC firms establish these conditions.
Another important difference between private equity and VC is that it generally focuses on potential startups seeking investment for the very first time, but private equity backs larger firms in the form of investments.
Companies with limited operating history and costs, so venture capital is a popular option for startups and new businesses. This potential of startups attracts venture capitalists, although it carries some risk. They need access to essential investments such as debt instruments, capital markets, and bank loans. The main drawback of venture capital is that it takes private equity in the company, so they influence the company’s decision.
History of VC
VC (Venture Capital) is a PE (Private Equity) division. However, its roots can be founded in the 19th century. But, it was only established after WWII. The father of VC is Georges Doriot. He started the ARDC (American Research and Development Corporation) in 1946. He raised more than 3.58 million dollars to invest in startups. His first investment was in an x-ray technology that was used for cancer treatment.
Pros and Cons of Venture Capital
There are so many benefits of VC. The biggest advantage of venture capital is to provide financial assistance to startups and new businesses. This funding is beneficial for companies with the potential to grow in the future. So, investors gain a substantial return. As mentioned above, this kind of investment can be given in any form. A startup can take advantage of venture capital to further grow its business. But, if a startup or business accepts venture capital, it may lose control over several things. On the other hand, venture capitalists demand a large chunk of share in the company, which makes it a disadvantage.
Advantages
- Offers initial investments to startups in order to grow their business.
- Startups and new businesses don’t require cash flow in order to maintain venture capital funding.
- VC-backed networking and mentoring services allow startups to find new growth opportunities and talent.
Disadvantages
- Venture capitalists demand a huge share of the company.
- Companies can lose their control over several things and decisions.
- Venture capitalists can exit investments which can put the company under huge pressure.
Why is Venture Capital Important?
Entrepreneurship and innovation are two important factors of a capitalist economy. These days, businesses are highly risky and complicated. That’s why VC supports companies to achieve their short and long-term business goals. They gain private equity in the company in return. So, venture capital allows startups to accomplish their business vision and plans.
What % of a Company do VCs Take?
Well, this depends on their investment, type of business, and its future. It also depends on the connections between the founders and investors. However, venture capitalists usually take between 25 and 50 percent of ownership of a startup.
Final Thought | Venture Capital
For new businesses and startups, venture capital is really important for a greater prospect. However, this process is very time-taking and complicated as well. When a new company starts its business, it requires a lot of capital to find resources, manufacture products or services, rental services, and hire employees. This funding mostly comes from venture capitalists. But, they demand a huge share in the company’s ownership. Angel investors also provide resources or capital to new businesses in the early stage, but they are followed by venture capitalists later. In other words, angel investors are not different from venture capitalists.
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