Venture Capital (VC) firms operate similarly to Angel Investors but do have some very distinct differences. Venture Capitalists give capital in exchange for equity just like Angel Investors, however VC firms usually only invest when a company is already established and showing great returns. They want to invest in a company that is doing well but needs capital to grow and expand. You will need to show what the needed capital will be used for and how it will significantly impact the landscape of your business. The returns must be significant or it won’t be worth the time and money for the investors. These are serious businesswomen and men, so be sure to have a killer presentation, a kick-ass business plan and anticipate answering some tough questions!
Venture Capital Funding is an investment fund that manages money from investors who are seeking private equity stakes in startups and small to medium sized firms with strong growth potential. These investments are generally characterized as high risk/high return opportunities. “The typical venture capital investment occurs after the seed funding
round as growth funding round (also referred to as Series A round
) in the interest of generating a return through an eventual realization event, such as an IPO
or trade sale
of the company. Venture capital is a subset of private equity
. Therefore, all venture capital is private equity, but not all private equity is venture capital.”
Pro: Venture capital can provide the money you need to grow. For instance, if you are making sales, but need to spend on ramping up production or expanding your sales force into new territories, venture capitalists can provide the cash. Unlike a bank loan, there won’t be a drain on cash due to repayments. It’s also worth noting that venture capital investors won’t micro-manage your company, but they will provide help, advice, and contacts.
There is a price to be paid in equity. To compensate for their risk, venture capitals require high equity. Entrepreneurs often find that to secure a venture capital deal, they have to give up a greater share of the company than they originally expected. In cash terms, that is not necessarily a bad thing, but if you’re starting a business with the intent to be the only owner, this is not the route you should take. Also remember that the amount of stake they have in your company corresponds with how much they will get paid out when the company is profitable.