Venture capital is a form of private equity financing provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake. Venture capital is 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 and develop.
Here are some key points about venture capital:
- Venture capital is a subset of private equity.
- Venture capitalists can provide backing through capital financing, technological expertise, and/or managerial experience.
- VC can be provided at different stages of a companys evolution, although it often involves early and seed round funding.
- Venture capital is an attractive deal for entrepreneurs because it can provide finance, technical expertise, mentoring, talent acquisition, strategic partnership, marketing "know-how", and business models.
- Venture capital fills the void between sources of funds for innovation (chiefly corporations, government bodies, and the entrepreneur’s friends and family) and traditional, lower-cost sources of capital available to ongoing concerns.
- Venture capital is a major source of funding for tech startups and other high-growth-potential companies that are in need of capital but may not be able to secure conventional financing, like a bank loan.
- Venture capital is an alternative investment that’s typically only available to institutional and accredited investors.
Venture capital investments are risky and take place before a company goes public or, in early-stage companies, even before a company has an established track record. The possibility of large losses, even the entire investment, is factored into the VC’s business model. In fact, VCs anticipate that they’ll lose money on most investments. The odds of hitting a “home run,” earning over 10X the venture capital investment, is small and can take years to realize.
