Venture capital private equity financing provided by firms

Venture capital (VC) is a form of private equity financing provided by firms or funds to startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in terms of number of employees, annual revenue, scale of operations

1. Innovative source of financing: Venture capital: Venture Capital is a mechanism wherein investors support entrepreneurial talent by providing finance and business skills in order to obtain long–term  capital gains by exploiting market opportunities.

2. Advantages of Venture Capital 1. Opportunity for Expansion of the Company Venture Capital provides the company with an opportunity to expand. This would not have been possible through other methods like bank loans. Bank loans require collateral and there is an obligation to repay the loan.  However, in venture capital, the investors themselves are ready to take the risk as they believe in the company’s long-term success. Therefore, venture capital financing is beneficial for start-ups with high initial costs and limited operating history.

3. 2. Valuable Guidance and Expertise Besides capital financing, venture capital is also a source of valuable guidance, expertise, and consultation. A member from the venture capital firm is usually appointed to the board of the start-up company. This allows the active involvement of the venture capitalist in the company’s decisions. As venture capitalists have experience in building and expanding start-ups, their expertise and guidance can prove to be beneficial. They can help with building strategies, technical assistance, resources, etc. in order to make a business successful.

4. 3. Helpful in building networks and connections Venture capitalists have a huge network of connections in the business community. These connections could be advantageous for the start-ups to grow and become successful. They can help the start-up to enter into alliances with potential customers or business houses.

5. 4. No obligation for repayment There is no obligation to repay the venture capitalist investors if the start-up fails or shuts down. Hence, venture funding is essential for start-ups. It does not leave the start-up with the burden to pay back as is the case with bank loans.

6. 5. Easy to locate It is very easy to find and locate VC within minutes, investors, as they are documented in various directories. This reduces the time, effort, and money involved in searching for venture funding. One can find a VC quickly and efficiently. For instance, you can get a huge list of venture capital firms by typing on any search engine.

7. Disadvantages: 1. Dilution of Ownership and Control Venture capitalist provides huge capital to the start-ups in return for a stake in the equity of the company. If the start-up succeeds, then it helps them earn tremendous amounts of profit. VC’s usually become a part of the Board. They actively participate in the company’s decision-making. VC’s will want to protect their investments. If there is a difference of opinion between the VC and the start-up founder, then things can get chaotic. Any major decision requires the consent of investors.

8. 2. Early Redemption by VC’s A VC may decide to redeem the investment within 3 to 5 years. Their primary focus is to earn capital gains. Venture capital may not be suitable for an entrepreneur whose business plan will take a longer time to provide liquidity.

9. 3. Long and Complicated Process The start-up company’s owner should first present a detailed business plan. Thereafter, the VC analyses the business plan in detail. Then, a one-on-one meeting is conducted to discuss the business plan in detail. Later, if the VC agrees to go ahead with the funding then  due diligence  is done to verify the details. If the due diligence is found satisfactory then only the VC will offer a term sheet. Therefore, venture capital funding is often found to be a lengthy process.

10. 4. VC’s take a long time to decide Venture Capital funding involves a huge amount of risk. So, VC’s usually takes lots of time to decide whether they want to undertake investment or not. Venture funding may be a great source of availing funds for start-ups. However, the long wait before receiving the funds is a huge drawback.

11. 5. Approaching a VC can be tedious A lot of investment opportunities through uninvited emails overburden the VC’s. Due to this a lot of business proposals go unnoticed. One of the ways to approach the VC is through a mutual connection.

12. Stages of venture capital financing The Seed Stage The Start-up Stage The First Stage The Expansion Stage The Bridge Stage

13. 1. The Seed Stage Venture capital financing starts with the  seed-stage  when the company is often little more than an idea for a product or service that has the potential to develop into a successful business down the road. Entrepreneurs spend most of this stage convincing investors that their ideas represent a viable investment opportunity. Funding amounts in the seed stage are generally small , and are largely used for things like marketing research , product development , and business expansion, with the goal of creating a prototype to attract additional investors in later funding rounds

14. 2. The Startup Stage In the startup stage, companies have typically completed research and development and devised a business plan, and are now ready to begin advertising and marketing their product or service to potential customers. Typically, the company has a prototype to show investors, but has not yet sold any products. At this stage, businesses need a larger infusion of cash to fine tune their products and services, expand their personnel , and conducting any remaining research necessary to support an official business launch.

15. 3. The First Stage Sometimes also called the “emerging stage,” first stage financing typically coincides with the company’s market launch, when the company is finally about to start seeing a profit. Funds from this phase of a venture capital financing typically go to actual product manufacturing and sales , as well as increased marketing. To achieve an official launch, businesses usually need a much bigger capital investment, so the funding amounts in this stage tend to be much higher than in previous stages.

16. 4. The Expansion Stage T he expansion stage is when the company is seeing exponential growth and needs additional funding to keep up with the demands . Because the business likely already has a commercially viable product and is starting to see some profitability, venture capital funding in the emerging stage is largely used to grow the business even further through market expansion and product diversification.

17. 5. The Bridge Stage The final stage of venture capital financing, the bridge stage is when companies have reached maturity . Funding obtained here is typically used to support activities like mergers, acquisitions The bridge state is essentially a transition to the company being a full-fledged, viable business. At this time, many investors choose to sell their shares and end their relationship with the company, often receiving a significant return on their investments.