Venture Capital


Venture Capital 

A type of private equity, a form of financing that is provided to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth (in terms of number of employees, annual revenue, or both). Venture capital funds invest in these early-stage companies in exchange for equity–an ownership stake–in the companies they invest in. The start-ups are usually based on an innovative technology or business model and they are usually from the high technologyindustries, such as Information technology (IT), social media or biotechnology. The typical venture capital investment occurs after an initial "seed funding" round. The first round of institutional venture capital to fund growth is called the Series A round. Venture capitalists provide this financing in the interest of generating areturn through an eventual "exit" event, such as the company selling shares to the public for the first time in an Initial public offering (IPO) or doing a merger and acquisition (also known as a "trade sale") of the company.
In addition to angel investing, equity crowdfunding 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 early-stage companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the companies' ownership (and consequently value). Venture capitalists contribute more than financing to these early-stage firms; they also often provide strategic advice to the firm's executives on its business modeland marketing strategies.
Venture capital is also a way in which the private and public sectors can construct an institution that systematically creates business networks for the new firms and industries, so that they can progress. This institution helps identify promising new firms and provide them with finance, technical expertise, marketing "know-how", and business models. Once integrated into the business network, these firms are more likely to succeed, as they become "nodes" in the search networks for designing and building products in their domain. However, venture capitalists' decisions are often biased, exhibiting for instance overconfidence and illusion of control, much like entrepreneurial decisions in general.
Start up companies with a potential to grow need a certain amount of investment. Wealthy investors like to invest their capital in such businesses with a long-term growth perspective. This capital is known as venture capital and the investors are called venture capitalists. Such investments are risky as they are illiquid, but are capable of giving impressive returns if invested in the right venture. The returns to the venture capitalists depend upon the growth of the company. Venture capitalists have the power to influence major decisions of the companies they are investing in as it is their money at stake. There are typically six stages of venture round financing offered in Venture Capital, that roughly correspond to these stages of a company's development.[24]
  1. Seed funding: The earliest round of financing needed to prove a new idea, often provided by angel investors. Equity crowdfunding is also emerging as an option for seed funding.
  2. Start-up: Early stage firms that need funding for expenses associated with marketing and product development
  3. Growth (Series A round): Early sales and manufacturing funds. This is typically where VCs come in. Series A can be thought of as the first institutional round. Subsequent investment rounds are called Series B, Series C and so on...
  4. Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit. This can also be called Series B round and so on.
  5. Expansion: Also called Mezzanine financing, this is expansion money for a newly profitable company
  6. Exit of venture capitalist: VCs can exit through secondary sale or an IPO or an acquisition. Early stage VCs may exit in later rounds when new investors (VCs or Private Equity investors) buy the shares of existing investors. Sometimes a company very close to an IPO may allow some VCs to exit and instead new investors may come in hoping to profit from the IPO.
  7. Bridge Financing is when a startup seeks funding in between full VC rounds. The objective is to raise smaller amount of money instead of a full round and usually the existing investors participate.

8.    Between the first round and the fourth round, venture-backed companies may also seek to take venture debt. 

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