What is “Venture Capital”?

       Venture Capital refers to the funds provided by investors (also known as the venture capitalists) to start-up companies and small businesses with the potential for long-term growth. Venture Capital provides the financial resources to start-ups which may not have the access to capital markets otherwise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. Venture Capital helps solve the problems for entrepreneurs who have difficulties raising funds by issuing debt. What entrepreneurs need to keep in mind is that venture capitalists usually have a say in company decisions on top of holding a portion of the company’s equity.

      

           The loans Venture Capital makes to start-up companies are often high in rates with the possibility of an annual return rate up to 50 percent. However, unlike banks and other lenders, venture capitalists can take equity position, which means that you can give a portion of your or other owner’s interest in the company to the venture capitalists instead of paying out cash in the form of interest and principal instalments. 

   
Companies that venture capitalists are most interested in are those who have:

     1. Rapid, steady sales growth;

     2. A new technology or dominant position in an emerging market;

     3. A sound management team;

     4. The potential for being acquired by a larger company or getting publicly listed in the stock market.

    
 There are three different types of venture capital:

  
 1. Private venture capital partnerships are perhaps the largest source of risk capital and generally look for businesses that have the capability to generate a 30 percent return on investment each year. They like to actively participate in the planning and management of the businesses they finance and have very large capital bases--up to $500 million--to invest at all stages.

     

      2. Industrial venture capital pools usually focus on funding firms that have a high likelihood of success, like high-tech firms or companies using state-of-the-art technology in a unique manner.

     

      3. Investment banking firms traditionally provide expansion capital by selling a company's stock to public and private equity investors. Some also have formed their own venture capital divisions to provide risk capital for expansion and early-stage financing.

The way to contact venture capitalists is through an introduction from another business owner, banker, lawyer, or other professional who knows you and the venture capitalist well enough to approach them with the proposition.