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What is Venture Capital (VC)?

Venture Capital

About Venture Capital

What is Venture Capital (VC)?

Venture Capital is a financing tool for companies and an investment vehicle for wealthy individuals and institutional investors. Wealthy investors like to invest their capital in startups with a long-term growth perspective. This capital is called venture capital and the investors are called venture capitalists, in other words, it is a way for companies to receive money in the short term and for investors to grow wealth in the long term.
 
Venture Capitals tend to focus on emerging companies and such investments are risky as they are illiquid, but also have the potential to provide impressive returns if invested in the right venture.

A venture capital firm can finance a company by equity participation and capital gains, participating in debentures and also extending conditional loans to the firms.
 

Funding process for VCs

Venture Capital firms raise money from banks, corporations, funds. The firm or investor, if interested in the proposal by the company who has submitted the business offer, then performs due diligence, which includes a thorough investigation of the company's business model, products, management, and operating history, among other things.
 
VCs have the power to influence the decision-making in the company, monitoring its progress before releasing additional funds and guide the business to profitable growth. The investors then exit the company after a period of 4-6 years after the initial investment by means of a merger, acquisition or an initial public offering or IPO.

Advantages of VCs

1. They bring wealth and expertise to a startup as bankers are skeptical to lend money in the early stages due to lack of assets that can be hedged as collateral. This also helps VCs to take control of the firm and have a say in the company's growth.
 
2. Large sums of equity finance can be provided as startups do not stand the obligation to repay money which helps in accelerating their growth.
 
3. VC firms are better equipped to evaluate early-stage startups, using methods that go beyond financial statements — such as product, market-size estimates, and the startup’s founding team. Further, the equities are uncapped and so there is no upper limit to how much an investor can earn.
 

Watch Video: What are the various types of start-up investors?

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