You may have heard about venture capitalism from fellow investors, but you may still be skeptical.
Venture capital can be a lucrative path towards wealth creation since it offers above-average returns. However, like most high-return investments, it also involves higher risk.
In this article, we will run you through everything you need to know about venture capital—how it works and how it benefits you and the business you are investing in.
What Is Venture Capital?
Providing venture capital means investing in a small business that you believe has long-term growth potential. This is a type of private equity where you receive equity from the company in return.
This may involve a substantial risk for you as an investor as these new businesses often don’t have a long operating history to show banks. However, if you invest in the right companies, you can get above-average returns.
This also provides you with the privilege to be a life saver for a budding firm while also providing you with high earnings.
How Does the Transaction Work?
One way to get into venture capitalism is through venture capital firms. Along with companies and investment banks, investors can put their money into investment funds managed by venture capital firms. This firm will take care of this portfolio and look for suitable start-ups into which they can invest the working capital.
Unlike private equity, which focuses on established companies, venture capitalism focuses on emerging companies or start-ups. These venture capital firms usually specialise in a specific sector or type of business to invest in.
How Does It Benefit Both Sides of the Equation?
Ideally, both the venture capitalist and the budding entrepreneur will benefit from this investment.
The investors’ money is spent on a high-risk investment that can generate significant profit. Their funds are exchanged for ownership. If the company performs well, they stand to make money over a long-term period.
Entrepreneurs, in turn, receive funding to grow their businesses. Venture capital firms may also offer resources, such as recruiters, marketing teams, and in-house technology that help a startup hit the ground running. They can also offer training to grow an entrepreneur’s market knowledge and introduce them to potential partners.
Potential Stages to Consider
The stage the business is at may determine the type of funding and support they need. These stages are important to consider before starting venture capitalist funding.
1. Pre-seed and seed funding
At this stage, funding is needed to support market research, product development, and other early activities to prepare the business. At this point, the company may still be at the prototype level without a concrete idea of what it will look like.
The capital needed at this stage ranges between $100,000 to $250,000 for pre-seed and $1 million to $2 million for seed funding.
2. Series A funding
At this point, the business can prove its scalability and generate returns quickly. Some entrepreneurs at this stage have a proven track record of success within the industry through other start-ups.
The capital at this stage ranges from $2 million to $15 million, usually done through venture capital firms instead of individual investors.
3. Series B funding
At this stage, the business has passed through most of the development hoops and is instead moving into expansion. These businesses have had a successful launch and are looking into targeting a new audience.
Investments needed at this stage range from $7 million to $20 million.
Businesses at series C funding are at their final funding stage and often attract groups like investment banks and private equity firms instead. These businesses are considered safe bets and may need funding for further expansion.
While venture capitalism may promise high returns, they also come with greater risk. You would need to have a reliable investment adviser or venture capital firm to ensure sound investment decisions.