Getting Started With Venture Capital: An Introductory Guide

Venture Capital (VC) is among the major sources of funding for startups and other high-growth-potential companies that require capital but may not be able to secure financing through conventional methods like bank loans. Previously, Anand Jayapalan had spoken about how generally VC funding comes in a company’s early days, before they have any such meaningful revenue or even have finished their product. VC investments are usually made by well-established enterprises that specialize in finding the most promising young companies.

As banks and other traditional sources of financing are often to risk averse to invest in small companies or pre-revenue startups, an increasing number of entrepreneurs are turning to venture capitalists. A large number of companies that managed to raise VC funding successfully eventually developed rapidly scalable technologies. As opposed to other forms of financing, where entrepreneurs are only required to pay back the loan amount plus interest, venture capital funding is commonly provided in exchange for equity in the company. This helps in making sure that the VC firms profit in accordance with the risk they took if the company succeeds in the long run. In exchange for their funds, VCs might even receive a board seat, which provides them with a say in the future direction of the company.

VC funds come from venture capital firms. Such firms are largely comprised of professional investors who have a good understanding of the intricacies associated with financing and building new companies. The money invested by VC firms may come from a myriad of sources, ranging from private and public pension funds, endowment funds, and foundations, to corporations and wealthy individuals. The ones investing in venture capital funds are called limited partners. On the other hand, venture capitalists are the general partners charged with managing the fund and working with the individual enterprises. These general partners or venture capitalists take a pretty active role in working with the founders and executives of a growing company, to make sure that the business grows in a profitable manner.

A high return on their investment is expected by the VCs in exchange for their funding. This is usually delivered through a stake in the company. The relationship between the two parties can be lengthy. After all, rather than having the money repaid immediately, VCs tend to work with the company for five to 10 years before any money is repaid. The venture capitalists sell their shares in the company at the end of the investment. This is generally done when the company is acquired or goes public. By selling off their shares, VCs aim to receive significantly more than their initial investment.

Earlier, Anand Jayapalan had mentioned that while both VCs and angel investors provide capital to startup companies, there are several key differences between such investors. The key distinction between them is that VC funds tend to come from a firm or a business, while angel investments come from individuals. Secondly, while it is common for VC firms to invest millions of dollars in a company, angel investors typically invest less than $1 million. Owing to their smaller investment, angel investors generally have a less hands-on role than venture capitalists.