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What is venture capital?

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Last editedApr 20212 min read

Venture capital is a type of equity funding provided by investors for a business that isn’t listed on the stock exchange. Venture capital funding is generally invested in companies in an early stage of development, the assumption of the investors being that the longer-term growth of the company will provide a good return on the investment. 

How is venture capital invested? 

A large percentage of venture capital funding takes the form of seed and start-up capital. Often, however, venture capital will be invested again at a later date, in the form of development capital that enables the company to grow and consolidate its position in the market. 

Is there a difference between venture capital and angel investment?

Angel investment, made by angel investors, is put into a business by individuals risking their own money, whereas venture capital involves money which has been raised from third parties. In addition to this distinction, angel investment is more likely to be made at an even earlier stage in the development of a company – sometimes even during the initial funding round. 

The pros of venture capital funding

One of the main advantages of venture capital funding is that it can inject money into a business at a key moment, such as when opportunities for growth and expansion are clear but the funding is needed to take advantage of them. Many businesses at this stage of their development won’t have the kind of track record needed to access more traditional forms of funding at the scale needed to fully grasp the chance for growth. In addition to the money being invested, a venture capital company and the individuals who work there will often also be in a position to provide help in the form of mentoring, advice and access to contacts. 

When should a business look for venture capital funding?

It can take quite a while to find the perfect venture capital partner for your business, so if you feel you might need venture capital funding in three to six months’ time then the time to start looking for that funding is immediately, rather than when the funding becomes imperative. Draw up an accurate roadmap of the business development you have planned for the future and clearly identify those occasions on which extra funding could be needed to shift your activities up a gear. 

The venture capital companies you go to will want to see exactly when the investment will be needed, what it will be used for and the impact you expect it to have. The more detailed and credible your business plan is, the more likely a venture capitalist firm will be to make the investment you need. 

Are there any downsides to venture capital funding? 

The time and effort involved in finding and persuading the right venture capitalist for your company could eat into time that would be better spent actually running the business. Assuming you’re able to divide your time up in an efficient manner, however, the main disadvantage of venture capital funding is that the company making the investment will take some of the equity in your business in return for the investment. This means that if you ever sell your company the venture capitalists making the investment will be entitled to a share of the profits. 

Venture capitalists will also usually require a seat on the board of your business, and a say in the direction it takes in the future. The degree of control exerted by venture capitalist investors differs from case to case, which is why it is vital to check the details of any agreement extremely carefully before signing a contract.    

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