Entrepreneurs can apply venture capital when starting a new company, among various financing options. Venture capital is money that is given to help build new startups that have a strong growth potential.

Many venture capital firms invest in companies in the healthcare sector or have developed a new technology, such as software. A new breed of venture capital firms has focused on investing in socially responsible companies.

Entrepreneurs often provoke capitalists for money because their company is so new, unproven and risky that more traditional https://www.startupcolleges.com/, such as through banks, are not readily available.

Unlike other forms of financing, where entrepreneurs are only required to pay back the loan amount and interest, venture capital investment usually requires a portion of ownership in exchange for money. This is to ensure that they have a say in the future direction of the company.

Not all venture capital investments are made when a company is being set up for the first time. Venture capitalists can provide funds at various stages of a company’s progress.

Research by the National Venture Capital Association showed that in 2010, venture capitalists invested approximately $ 22 billion in about 2,749 companies, of which 1,000 received funding for the first time. Among the more well-known companies receiving venture capital during the startup period are Apple, Compaq, Microsoft and Google.

Where does venture capital come from?

Venture capital funds come from venture capital firms, which include professional investors who understand the complexities of financing and building newly formed companies.

The money that capital firms invest comes from private and public pension funds, endowment funds, foundations, corporations and wealthy individuals, both domestic and foreign sources.

Venture capital funds are considered limited partners, while venture capitalists are considered general partners for managing the fund and working with individual companies.

General partners play a very active role in working with the founders and executives of the company so that the company is growing profitably.

In return for their funding, venture capitalists expect a high return on their investment as well as the company’s shares.

This means that the relationship between the two parties can be prolonged. Instead of immediately working to repay the debt, venture capitalists work with the company five to 10 years before any money is repaid.

At the end of the investment, venture capitalists sell their shares to the owners in the company, or through an initial public offering, with the expectation that they will receive substantially more than their initial investment.

Venture Capital vs Angel Investors

While both types of investors provide capital to startup companies, there are several important differences between venture capitalists and angel investors.

The biggest difference is that venture capital comes from a firm or business, while angel investments come from individuals.

The other main difference is that while new startups usually receive millions of dollars in venture capital, angel investors typically do not invest more than $ 1 million in a project.

A third difference is that venture capitalists typically invest in startups that they think have the potential to generate significant profits, while angel investors typically prefer to invest in firms that operate in industries Which angel investors are personally familiar with. Fourth, angels do not always want them to have a role in the running of the company, while venture capitalists do. Related:-12 Best Books for Entrepreneurs And Small Business Owners 2020

Examples of venture capital

Before going to the venture capitalist, it is important that you are well aware of the type of capital you need. There are various types of capital financing here.

Seed (Initial) capital

This is the investment capital needed to conduct the market research required before establishing the business. It also covers the cost of producing a sample product and its administrative costs. Some venture capitalists are ready to invest at this stage.

Startup capital

These are capital requirements for key management, additional research, finalizing the product and hiring services to the market.

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Early stage capital

This is capital introduced at Break-Even Point to increase sales and increase business efficiency.

Expansion capital

This is the money needed to expand its product to other products or regions. Funds will be used to increase market efforts for new products.

The last step is capital

Capital is invested to increase marketing and increase working capital, increasing the company’s production capacity.

Bridge financing

Bridge financing is provided to facilitate mergers and acquisitions or to attract public financing through the issuance of shares.

The pros and cons of venture capital for entrepreneurs

As a startup or small business owner, you may not qualify for financing from traditional lenders or credit unions, you have a few different options.

The alternative is that you may qualify for certain types of financing; Another option is Bootstrap if you do not want to give up the majority or control of your business.

If you are pursuing venture capital, or you are contacting an investor, there are some advantages to be aware of along with these types of financial arrangements as well as some issues.

Business growth

Venture capital provides an opportunity for business growth. The struggling companies are given the financial muscle they need to achieve their goals.

However, for the capital infusion your business receives, most venture capital firms need more than 50% ownership stake in your company, which means that you have no final decision on basic management decisions.

Valuable guidance and expertise

Venture capital firms are actively involved in running the business, providing their expertise and guidance in the decision-making process.

They help in creating strategies, resources, and providing technical assistance. Venture capitalists often have a wide network of connections, which provides the company with a solid customer base.

On the other hand, your company may be on the verge of success without using investor money. With some adjustments to your business model, you can increase profitability without hiring expensive employees or hiring management professionals who don’t understand your business, your products or services, or who don’t. Not for long. .

Some venture capital contracts state that the venture capital firm does not comply with certain non-binding restrictions, meaning that the company may invest in (or invest in) competing firms.

No obligation to repay

If your startup fails, as an employer, you don’t have to pay. However, you lose control of your company, as well as your initial investment in the company, as well as your dreams and time and investment you have invested in your business over the years. Related:-How to research your market and competitors 2020

If you are in the stage of making or breaking extra money in your startup or business, carefully consider your ultimate goal, the options available to you, and what is ultimately best for you and your business. 

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