What is venture capital?
Venture capital is one of the most effective tools for fostering small and medium sized enterprises and also plays an important role for larger companies at the capital market in developed countries. It presents a source of equity capital for companies, as well as a lot of time and effort invested.
Investor becomes a shareholder in the company and bears all risks of business with the co-owner. Willingness of the venture capital investor to participate may positively encourage other potential investors such as banks and strategic investors to enter further financing rounds.
It is important to understand the difference between a financial investor (which includes venture capital) and a strategic investor. The second mentioned invests capital with a long-term goal while bringing new technologies, practices and markets. Financial investor is looking for an exit within typically 3 to 5 years by selling its stake.
Nevertheless, a financial investor should bring more than just financial capital into the business. Mostly, such investors are engaged in financial and managerial consulting and bring access to large community of business contacts.
Most critical factor in the whole process is creating a partnership with the entrepreneur/co-owner/management based on common trust, seeing that the financial investor is typically in a minority position. That is why financial investors put a lot of emphasis on analyzing personnel assets of the company. In the end, it is all about people, so a good manager is better than a sound business plan.
Venture capital helps companies to go through different stages of their life:
- Seed capital, Start-up, Early stage
- Development and Expansion capital
- Mergers&Acquisitions, Restructuring capital, Management buy-in/buy-out, Spin-off.