Discover what venture capital is and how to choose it
Venture capital is an essential resource for small and medium-sized companies that aim to improve their financial ecosystem, and is one of the main forms of investment funds. The latter’s objective is to invest in companies and startups still in their early beginnings but with high growth potential.
In this post, you will learn what venture capital is, its objectives, who investors are, and how to raise this money. Keep reading!
What does the term Venture Capital mean?
Venture capital is a form of investment fund that capitalizes and invests in startups and small or medium-sized companies. These usually happen to be new companies in the market but with a well-defined business model and good growth expectations.
These are high- risk financial options that may include one or more investors, who, in addition to financing the company’s development, can directly influence the decisions taken and the management of the business.
How does venture capital work?
On one side you have a venture capitalist and on the other the company that needs financing to implement its activities and have working capital .
However, in this form of investment, it is important to keep in mind that, in addition to the resources, the investor can influence the management of the business, using their expertise in different areas, such as finance, to improve cash flow , for example, and to outline other strategies.
In general, such investment is applied to startups with a scalable and repeatable model. Businesses in the technology sector are preferred for this modality and some billion-dollar brands have already been financed under this scheme.
This is the case with Apple, Microsoft, Yahoo, Google, LinkedIn and many others. In return, the startup is required to agree to share a percentage of the profits, as well as space for strategic decision-making by the investor.
What is venture capital for?
It is used to finance companies in the early stages, but which have growth potential and works as a modality that can bring a high return to the investor.
Thus, unlike companies that are publicly traded on the stock exchange and thus easily attract shareholders, companies seeking to raise venture capital are unknown and are taking their first steps. Therefore, it is a business conducted outside the capital market.
How to raise venture capital?
For businesses in the early stages, venture capital can be a great opportunity to boost your company. To be able to attract this investment, you need to know clearly whether your business has real potential for growth and stability.
It is essential to conduct good market research and understand the specific niche in which you will operate. Promoting your business, prospecting for investors and organizing processes are activities that should be part of your routine. Know how to sell your idea well and count on a team prepared to help you with these issues.
Who are venture capital investors?
Venture capital funds can be made up of just one investor or several, holding companies or investment managers. This type of fund is usually divided into:
- firm: entity that invests in private companies or startups
- fund: mechanism by which firms invest in companies;
- partners: the firm’s administrators.
To put it plainly, these investors’ primary goal is to generate profits and solid financial returns. The ownership percentage is a commonly employed tactic to ensure the profitability of the investment by allowing these shares to be sold at a price substantially greater than the amount invested in the future.
When investing in startups , the main attraction is the possibility of rapid and exponential growth of the company, which guarantees the appreciation of investments.
Venture capital and other investments
In addition to venture capital, there are other types of financing that invest in companies and enable the expansion of these businesses. Learn about the most common ones and their main characteristics.
Bank loans
It is a contract between the customer and the financial institution, which will receive an amount to be returned within a set period, with the addition of interest.
Banks do not usually take many risks, so your company must already demonstrate some financial stability or have available investment funds. Therefore, it is not common for this type of loan to be made to businesses in the opening or initial phase.
Private Equity
The Private Equity modality, or private equity, usually invests in companies with stability and some market experience.
It symbolizes the equity, or the shares defining the ownership or participation in the business. The investors purchase shares of a private company or may try taking over public companies with the view to take them private at a later date.
The main difference between private equity firms and venture capital firms is that private equity firms usually buy out or almost buy out the companies in which they invest. Venture capital firms try to spread their investments so that risk would be reduced.
Angel Investment
Angel Investment is a highly sought-after type of investment to implement a business and carry it out based on a well-founded initial idea. It offers a series of advantages for both the investor and the recipient.
The investor provides the financial capital needed to open the business and also offers intellectual support, sharing their experience and market knowledge. In return, they receive a minority equity stake.
Typically, such an investor does not assume an executive position in the company, but operates as a type of strategic advisor, enhancing the chances of success.
Other common questions about venture capital
Check out more information with answers to the most frequently asked questions on this subject.
What is a venture capital firm?
These are companies that work to finance startups and emerging businesses focused on innovation. They have specific investment programs for organizations with this profile, gaining, in return, a shareholding.
What is the venture capital market?
It is a modality outside the capital market, in which investors allocate resources in young companies, generally in the technology or innovation area, which have great growth potential.
What is a CVC fund?
Corporate Venture Capital (CVC) is a type of investment in which a company invests in a startup seeking innovation through this collaboration, so it is an investment that has a more strategic role.