Venture Capital generally refers to the funding provided by sophisticated investors to start-up or small companies to grow their business. When the company grows, the venture capital funding increases as the venture capital firm owns a stake in the company. In return, the venture capital firm benefits from the company’s growth. Venture capital funding is also known as risk or patient risk capital, as the VC firm must wait patiently to get the returns.
Although a company can raise venture capital funding at any stage of its existence, venture capital funding is usually raised in the beginning stages of the company. Since venture capital funding is raised in the beginning stages of the company and the funding is significant, the venture capital firm bats for the business’s success. Raising venture capital funding puts the fund managers in your corner.
Features of Venture Capital
As venture capital funding is for the long term, the motivation is long-term capital gains. The chances of venture capital funding are higher if the company is innovative. Venture capital funding can be in the form of equity, debt, loans, etc. Also, it is expected that the venture capital firm will provide the correct advice, counsel, expertise, assistance in negotiations, etc.
Starting and managing a business is difficult, and most entrepreneurs understand this. When the going gets tough, the venture capital firm can provide the necessary guidance and push to help the firm to move forward. They offer their knowledge and expertise to help you navigate the difficulties in the business.
Stage of funding
The venture capital funding stage is broadly classified into two parts:-
- Early-Stage Financing- It includes the angel round of funding, the seed round of funding, and the series A round of funding. It is usually done to help set up the business and streamline the processes. After a proof of concept, you can expect to get early-stage financing from a venture capital fund.
- Expansion Financing- This financing stage is for companies running well, and the business can expand with funding. This is in the later stages of the company and is usually to expand the business or prepare for an exit.
Advantages of venture capital
The advantages of venture capital funding transcend beyond the money raised. The venture capital fund’s knowledge, expertise, and resources are much more useful. When a venture capital fund invests in a business, its financial interests are tied to each other, and the venture capital fund will bring in its experts to help the company succeed.
A venture capital fund will connect the business to similar or complementary businesses. They will ensure that the business gets the necessary technical expertise, financial expertise, and other valuable insights to succeed in its business. In short, the business’s success financially benefits all involved parties.
Examples of venture capital
There are many examples of venture capital funding in the Indian markets. VC funds like Tiger Global, KKR, Accel Partners, Temasek, Lightrock India invest in Indian start-ups. Every year, many start-ups get funding from venture capital funds.
A unicorn is a start-up with a $1 Billion or more valuation. Recently, Shiprocket became the 20th firm this year and 106th overall to turn a unicorn. The company is a logistics start-up, and it received $32 million from Temasek, Lightrock India and others. The valuation of the firm has become $1.3 billion. Other unicorns this year include MamaEarth, Fractal, Leadbox, Dealshare, etc.
Venture Capital firms have invested in many Indian start-ups like Zomato, Swiggy, Oyo, Physics Wallah, Byju’s, etc. The venture capital funds provide the firms with the expertise to expand the business, and the venture capital firms aim to get the firms ready for IPOs to exit at a profit.
FAQs
VC firms raise money from limited partners to invest in promising startups or even larger venture funds. Another example is investing in larger venture funds. The larger venture funds can have a clear target in mind for the kind of companies they want to invest in, like an EV (electric vehicle) company.
What is venture capital easily explained? ›
Venture capital (VC) is a form of investment for early-stage, innovative businesses with strong growth potential. Venture capital provides finance and operational expertise for entrepreneurs and start-up companies, typically, although not exclusively, in technology-based sectors such as ICT, life sciences or fintech.
What is the best definition of venture capital? ›
Venture capital is money, technical, or managerial expertise provided by investors to startup firms with long-term growth potential. A liquidity event is an event that allows early investors in a company to cash out some or all of their equity.
What is venture capital for dummies? ›
Venture capital (VC) is a form of private equity and a type of financing for startup companies and small businesses with long-term growth potential. Venture capitalists provide backing through financing, technological expertise, or managerial experience.
What is a venture example? ›
noun. an undertaking involving uncertainty as to the outcome, especially a risky or dangerous one: a mountain-climbing venture. a business enterprise or speculation in which something is risked in the hope of profit; a commercial or other speculation: Their newest venture allows you to order their products online.
What is an example of a business that uses venture capital? ›
(VC) is a key engine for growth in the U.S. economy. It has financed juggernauts such as Hewlett-Packard, Microsoft, and Apple, helping to make the U.S. the world's most dynamic economy. Venture capital firms finance young, private companies that they judge will grow, in exchange for an equity stake in the company.
What is venture capital for beginners? ›
For beginners, the first step is to gain a thorough understanding of the VC ecosystem. This means familiarizing oneself with the different stages of funding (seed, early-stage, late-stage), and the roles of the various players involved, such as venture capitalists, angel investors, and entrepreneurs.
What is venture capital answer in one sentence? ›
Venture capital is money that is invested in projects that have a high risk of failure, but that will bring large profits if they are successful.
How does venture capital get money? ›
The capital in VC comes from affluent individuals, pension funds, endowments, insurance companies, and other entities that are willing to take higher risks for potentially higher rewards. This form of financing is distinct from traditional bank loans or public markets, focusing instead on long-term growth potential.
What clearly defines venture capital? ›
Venture capital (V.C.) is a kind of financing that investors give to startups that are believed to have long-term growth potential. The investment can come from rich, banks, and other financial institutions. But, it does not always take a monetary form. It can also come in the form of technical or managerial expertise.
A short-term capital provided to industries. A long-term start-up capital provided to new entrepreneurs. Funds provided to industries at times of incurring losses. Funds provided for replacement and renovation of industries.
What is a venture capital fund in simple terms? ›
What are Venture Capital Funds? Venture capital funds are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as very high-risk/high-return opportunities.
What is venture capital in a sentence? ›
The working of venture capital firms as bundlers of knowledge and capital with other qualified intangible inputs has been well explored. From the Cambridge English Corpus. Programs have been established to improve the utilisation of advanced technologies and to expand access to venture capital funds and high risk loans ...
What is the objective of venture capital? ›
Venture capital (VC) is a form of private equity funding that is generally provided to start-ups and companies at the nascent stage. VC is often offered to firms that show significant growth potential and revenue creation, thus generating potential high returns.
What is the difference between investment and venture capital? ›
The first and primary difference between venture capital and investment banking is that venture capital firms typically invest directly into companies, while investment banks tend to serve as intermediaries in various financial transactions.
What is an example venture capital method? ›
Startup Valuation Example
The company's “comps” – companies comparable to it – are trading for 10x earnings, implying an expected exit value of $100M ($10M x 10x). The discount rate will be the VC firm's desired rate of return of 30%.
What is an example sentence for venture capital? ›
He could take up a venture capital trust now. In particular, the enterprise investment scheme and venture capital trusts will stimulate funds for unquoted trading companies.
How does a VC make money? ›
VCs make money in two ways. Venture capitalists make money in two ways. The first is a management fee for managing the firm's capital. The second is carried interest on the fund's return on investment, generally referred to as the “carry.”
