BusinessGFA Opinion

GFA Opinion: How Does Venture Capital Work?

WHAT IS VENTURE CAPITAL?  

Venture capital is a form of private equity financing provided by investors to startups, early-stage companies, and small firms looking to expand that has been speculated to have a long-term growth prospect. 

The investors are called VENTURE CAPITALISTS. Venture capitalists provide funding for growing businesses and, in turn, get equity from the company. 

To mitigate the risks associated with venture capital, VC firms collaborate to invest, with one serving as the “lead investor” and the others as “followers.” Venture capital firms get money if the start-up they invested in thrives by generating money for other people and keeping a certain percentage of the profits. 

STAGES OF FUNDING 

Alongside financial assistance, venture capital firms may provide expert management and operational support. This support can be offered at various stages of their growth, mostly in the form of early and seed round investment. 

The various stages of funding are as follows: 

  • PRE-SEED ROUND: This is the first level of funding designed to assist the founders in their initial formation, such as starting a company, getting operations up-and-running, and achieving the milestones required to raise a seed round. 
  • SEED ROUND: This is one of the early stages of funding that assists emerging businesses after considerable market research has been completed and the next step is to gain traction. 
  • SERIES A: This level of funding is offered only after the firm has demonstrated success in building its strategic vision and has the capacity to grow and generate revenue. 
  • SERIES B: This is another round of financing that occurs after the company has achieved specific milestones and has progressed well beyond the startup stage. 
  • SERIES C: This stage is all about expanding the company and extending it as swiftly and successfully as feasible, with a greater emphasis on increasing the company’s valuation in preparation for an IPO (initial public offering). 
  • SERIES D: Some companies do not get to the stage. This round of funding is typically used to fund an exclusive situation, such as a merger or acquisition, and hence does not follow the standard venture capital funding cycle. 

IMPORTANCE OF VENTURE CAPITAL 

Venture capital is a vital tool for entrepreneurship development and, by extension, promotes the development of the start-up ecosystem.  

Some of the other advantages are:  

  •  It actively promotes start-up founders and SMEs to build industries by providing funding and, sometimes, operational support, thereby influencing economic growth in the digital market as well as the world’s economy.  
  • Most VC firms provide start-ups with access to their expertise and contacts, which may be quite beneficial in the operation of their business.  
  • It contributes to the creation of job opportunities in the context that many entrepreneurs who were initially unable to put their creative ideas to work due to a lack of resources are now able to do so, hence increasing employment for others. 
  • It contributes to the promotion of products and the progress of new technical developments by providing funds to startups that create them in order to improve the manufacturing and marketing of products and technology. 

DISADVANTAGES OF VENTURE CAPITAL 

Venture capital provides money, expertise, and contacts to help grow your business, which gives a plethora of room for expansion, but it also comes with its own fair share of concerns. Nothing is perfect, remember? 

Some of these concerns are: 

  • Considering that you do not own the company exclusively, all revenues made will also be divided accordingly. 
  • Some of your ideas may have to be eliminated because the VC firm also has a say in the company’s operations and their views might conflict with yours. 
  • To attract a venture capitalist, you may need to put in more effort than usual while completing the processes required to avoid undervaluation. 
  • There will be no way to fully retain control of your company because the VC will determine what to do with their share when it is time to exit. They may be prompted to liquidate their shares through an IPO or merge with another company. 

CONCLUSION 

Despite these minor concerns, this may be the best option to successfully finance your business. 

Make sure you’re well prepared before going out to find VCs. VCs only want to invest in companies that have done their research, understand the industry, and can operate a business. You have to be successful in convincing them that they will recover their money as well as profits. Look for VCs who are a suitable match for your company and deal. 

Be ready!!! 

Silas Ugochi

Silas Ugochi is a Staff Writer and Content Creator at GetFundedAfrica. Ugochi is an educated content writer who relishes using her skills to help GetFundedAfrica's Media Team achieve the goal of sharing the success stories of African entrepreneurs. When she isn't writing articles, she can be found listening to music, reading, or DJing.

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