Another notable source of funding for start-ups and businesses in early expansion stages is the venture capitalist and defined by the significant amount of money invested.
Venture capital (VC) can originate from one person; though it is typical for the venture capitalist to work in a professionally run venture capital firm. VC funds are usually obtained from corporations, wealthy individuals and foundations. These institutional funds – in large sums – represent investments in exchange for substantial equity in the businesses. It is a form of an investment referred to as equity financing.
Six types of venture capital funding exist.
The first three fall into the category of early-stage funding:
• Seed funding
• Start-up funding
• First stage funding
The next two are referred to as expansion funding:
• Second stage funding
• Bridge funding
While the last is:
• Acquisition/buyout funding
Related post: The Angel Investor
To attract venture capital, businesses ought to have some, if not all, of the following characteristics in place – a unique idea, a justifiable business model, high growth potential, the requisite experience, and a strong and reliable team. The venture capitalist seeks massive rates in return for the enormous capital power involved. And VCs almost always lean towards certain industries – biopharmaceuticals, information technology, clean technology.
Differences between the venture capitalist and the angel investor
Venture capitalist Angel investor
Invests institutional funds Invests personal funds
Must see growth potential before investing Interesting idea is sufficient
Might have a seat on the board Passive investor
Often part of a company Independent individual
Investment can take up to six months to process Investment can happen quickly
Power to oust the founder No power to oust the founder
Large funds Small funds
Later-stage business involvement Early-stage business involvement
Financial management background Former/current entrepreneur
7 Pros & Cons of Venture Capital
Like its angel investing counterparts, here are some advantages and disadvantages of going the venture capital route.
Large amounts of money are raised for the business.
There is no obligation by the founder(s) to repay venture capital funds like a bank loan.
Venture capital funds can help businesses grow and expand quickly.
VCs can assist with hiring and building a team for businesses.
Increased exposure and publicity for the businesses is possible this way.
VCs can help businesses with future rounds of funding raising.
VCs can connect businesses with industry experts and leaders who can help.
Finding the right venture capital can take time.
VCs take a long time to decide on investment choices.
Founders’ stake is greatly reduced once VCs are involved.
Businesses are expected to grow quickly and this can lead to unnecessary pressure.
The VC process can take months to conclude because of due diligence.
All the funds from the VC may not be released at the same time due to the huge amount involved.
VCs may want to redeem their investment between three to five years, and this may not align with the founders’ strategic plans.
Related post: 6 Sources of Funding for Start-ups