Everything You Need to Know About Venture Capital
If you're interested in the tech industry, you've probably heard the word ‘venture capital' tossed around plenty of times. While venture capital is a very common phrase in many circles, the majority of Americans still don't have a firm understanding of this type of funding. Fortunately, it's not as mysterious as it sounds – it's a relatively basic form of business funding that can help startups achieve massive growth.
Because startups and other new businesses have trouble finding funding for their ventures, they often use venture capital to try and raise high-risk money. Most traditional lenders and banks don't offer funding to high-risk startups or projects. They're much more risk averse than some of the other funding sources on the market. Venture capitalists invest in companies in their early stages in exchange for equity.
America: Venture Capital's Homeland
America has become known as the epicenter of venture capital. Because of the number of startups throughout the country, a range of venture capitalists have been active in trying to fund high-risk businesses. The aim is to provide investors with huge returns in the case that one of the startups experiences rapid growth.
For many years, other areas of the world have been much more risk averse when it comes to investing in early stage companies. This makes it hard for overseas businesses to get the early stage funding they're looking for. For this reason, many foreign startups travel to the United States to seek funding.
In many ways, America is the source for the world's venture capital. Investors in the region are much more inclined to take on high-risk investments. As a United States-based startup, you're located in a good position to seek venture capital. Though it must be said: the competition is high to obtain venture capital within the United States.
Venture Capital Vs. Angel Funding
The primary difference between angel investors and venture capital is the source of the capital. In most cases, a venture capitalist is a person or firm that invests other people's money. Venture capitalists will seek funding from clients that have a large appetite for risk.
They'll then use this money to invest in small startups or early stage companies. On the other hand, angel investors are typically people who invest their own money into companies. Most angel investors are rich individuals who are looking to invest in companies that may have a large return in the future.
Angel investing and venture capital also differ in terms of amount of investment. Venture capitalist typically invest much more into companies than angel investors. Because venture capitalists seek large sums of money from other investors, they typically have more money to invest into startups. They also typically invest in a broad range of companies.
Can You Obtain Venture Capital?
If you're planning on starting a startup, or you already have an early-stage business, you may be wondering if you'll be able to access venture capital. The reality is that this will depend entirely on your business and whether investors think it is a viable option. While venture capitalists do have an appetite for risk, they're not dumb with their money.
There are various venture capital funds and organizations that look at proposals from business owners. If you believe you have an idea or company that's worth investing in, there's no reason you shouldn't contact a venture capitalist to see if they can help.
This being said, you need to make sure you're prepared to provide the venture capitalist with as much information as possible. Investors are looking for business owners that understand the importance of investor money.
Venture Capital: A Solution to Financing
Because venture capitalists put money into companies that have a low chance of success, they're the perfect option for startups that don't currently hold large amounts of assets. In this way, venture capital has managed to solve a long-held problem for startup businesses – the inability to access lending from the traditional financial market.
The Equity Problem
The primary issue with venture capital is that it's not like a traditional loan. Instead of paying back the money, you provide the investors with equity ownership. These investors are effectively buying a stake in your company. If you want to raise more money from them in the future, you'll probably have to continue to sell shares in your company.
For some people, this isn't an issue. Still, if you want to retain as much control over your company as possible, it can be annoying to sell large amounts of it to other shareholders. Not only will this mean that you end up with less money if the company expands, you'll also have less control over the direction of your company.
For this reason, if you want to retain as much control as possible, it's often a good idea to seek traditional finance before you look to venture capitalists. Venture capitalists expect a return on their investment. If they don't believe that you're pushing the company in the right way, they may apply pressure on you to change the direction of your operations.
No matter what you do, don't assume that a venture capitalist is offering you a fair amount for your business. You have to remember that they'll be trying to get the best deal possible for a stake in your company. Fortunately, it is a bit in their interest to provide with a decent amount of capital – as you'll need this money to help expand the business and provide them with a return on their investment.
Either way, it's a good idea to hire a consultant or analyst to overview any offers and determine the true value of the equity stake the venture capitalist is purchasing. It's a difficult area of business to evaluate since there is so much risk involved.
Assess Your Options
Most business owners have to get flexible when it's time to try and finance a company. You will probably need to seek funding for a wide range of different sources. It's essential to be as flexible as possible when you're seeking funding. Also, make sure that you are okay with losing control of some of your company – that's the reality when you start selling equity to venture capitalists. Remember: there are no shortage of creative ways to obtain the money you need to expand your business.
If you have questions about venture capital, you've come to the right spot. We receive tons of FAQs about different topics related to venture capital. Check them out below!
General Venture Capital
Below are some general venture capital FAQs:
What is venture capital?
Venture capital is a form of private equity finance that normally targets startup businesses. Venture capitalists purchase equity stakes in companies they believe will expand. They're typically considered high-risk investments. In exchange for equity, your business will receive funding.
What is a venture capital firm?
A venture capital firm is a company that invests in high-risk startups. They purchase equity stakes in companies in exchange for funding.
How does venture capital work?
Venture capital is a form of business funding that allows high-risk businesses to access the funding they need to expand. Venture capitalists invest money in startups in the expectation that some of them will return large sums of money. Instead of obtaining a loan, businesses can obtain funding by selling equity to venture capitalists.
What is venture capital fund?
A venture capital fund is a fund that provides funding to small businesses that are high-risk. The fund purchases stakes in startups in exchange for funding.
How to get into biotech venture capital?
Biotech venture capital is a very niche industry. To get into the industry, you'll need to pool money together and have an ability to spot promising biotech firms in the early stages of their development.
Where does venture capital money come from?
This depends on the fund or venture capitalist you're working for. Most of the money comes from rich investors or institutions that are looking for a return on their money.
Why venture capital?
Venture capital allows you to obtain funding when it may not otherwise be possible. If you own or operate a startup, you may find that traditional lenders never want to provide you with funding. Using a venture capital firm allows you to sell an equity stake in your company in exchange for funding.
Is venture capital a type of financial services?
Yes. In a way, any type of lending or funding is a form of financial service.
How does venture capital funding work?
Venture capital funding works by providing high-risk businesses with money in exchange for equity stakes in the companies. Venture capitalists will receive large returns if the company succeeds.
How does venture capital bring investors and entrepreneurs together?
Venture capital brings investors and entrepreneurs together by providing an environment for business owners to seek investment for high-risk companies.
Does venture capital work?
Yes. In many cases, venture capital is an extremely successful form of funding. Some of the world's biggest companies (including Facebook, Alibaba, and WhatsApp) all benefited from early stage venture capital investments. But remember there are many types of business financing such as working capital loans for small business.
Obtaining Venture Capital
If you have questions about obtaining venture capital, check out the FAQs in the section below:
How to get venture capital?
There's no set way to obtain venture capital. The best idea is to build an excellent business plan and try and obtain the attention of investors. There are also venture capital firms that operate in different niches. You could consider contacting one of them directly.
How to apply for venture capital?
Again, there's no set way to apply for venture capital. You should begin networking and looking for different venture capital firms that have funded companies in your niche.
How to ask for venture capital?
The best way to ask for venture capital is to be as professional as possible and have a solid business plan. Venture capitalists will only want to work with you if they believe that they can trust you to expand the business. They're looking to make return – make sure they can believe in your dream.
How to prepare for a venture capital interview?
You need to know your company and industry inside out. You should be aiming to ensure you will be able to answer any possible question that's thrown at you. You should also be able to answer questions about how you believe you can grow your business. A solid business and growth plan is a must.
How to get a venture capital investment?
There's no formula for obtaining venture capital investment. You should start by networking and researching different firms that invest in companies in your niche. You'll then need to make a pitch that can convince a venture capitalist to get on board with your idea.
How to raise venture capital money?
You need to get in contact with the right people. There are a lot of venture capital funds and businesses that are dedicated to certain niches. Find out if there are any funds that work with your type of business. You need to start networking and contacting people quickly.
How to obtain venture capital?
This may seem like an easy question, but there's no golden answer to this query. You'll need to begin by speaking with people in the industry, attending events, and promoting your business. The goal is to get in front of a venture capitalist to pitch your business idea.
How to attract venture capital funding?
To attract venture capital funding, you need to start by promoting your business in the right spheres. Create positive attention around your business that will allow you to catch the eye of worthy investors. You should also begin networking with venture capitalists and other authority figures in your industry.
How to write a venture capital business plan?
There's no set way to write a venture capital business plan. While there are plenty of templates online, it's often best to hire an expert to help you build your business plan. It needs to be as professional as possible if you want to attract investors.
How to prepare for venture capital interview?
Make sure that you know everything about your company, industry, and the competitors you're facing. Also, have a solid business plan backed up with data and figures. It's always important to be an expert during your interview.
How to start a business with venture capital?
While venture capitalists are known to risk money, they put a lot of time and research into investing in the best companies. You shouldn't underestimate how hard it can be to obtain venture capital. You should start by networking and drawing attention to your company. You'll eventually need to pitch your idea to venture capital investors.
How do venture capital value companies?
They'll look at the market, the growth potential, the current financial figures, and your competition. Each venture capital company will approach the valuation process in a different way.
How to secure venture capital?
Unfortunately, there's not set way that you can secure venture capital. You need to start networking and introducing yourself to authority figures in the industry. You should also look up different venture capital firms that have successfully funded similar businesses to yours. Make sure to have a business plan and pitch in place to provide to potential investors.
How to value your startup for venture capital?
In most cases, you should seek the services of a third-party consultant that can help you analyze the value of your business. The reality is that it's hard to value startups because the risks are so high and rewards can be huge. It's not like traditional business evaluation.
Other Venture Capital Questions
If you haven't found the answers to your question above, check out our other venture capital FAQs below:
What is the major drawback of accepting venture capital?
The primary drawback associated with accepting venture capital is the fact that you have to sell equity in your company. This means that you'll own less of your startup and you'll also hand over partial control of the company to the investors. This is why many business owners look at traditional financing before venture capital.
What is the difference between private equity and venture capital?
There's not really a difference. In fact, venture capital is considered part of private equity. Private equity is a generalist term for investors who purchase stakes in companies in expectation of a return.
Who invests in venture capital funds?
A broad range of different investors invest in venture capital funds. In some cases, they are rich individuals looking for a large return on their money. In other cases, they are large institutions that invest in various funds.
What is a term sheet in venture capital?
A term sheet is one of the most critical components of any venture capital fund. In essence, a term sheet is a sheet that outlines the terms involved in the deal between you and the venture capital fund that's investing in your company.
What percentage of venture capital investments fail?
There's no definitive data on this number, but it is thought that around 75 percent of venture capital investments fail. For this reason, it's considered a high-risk investment.
How to raise venture capital for a tech startup?
You should start by looking at different venture capital funds in the tech startup space. Start networking and speaking with people in the tech venture capital industry. It's essential to meet the right people if you want to make a pitch for investment in your company.
What is cap table in venture capital?
A cap table is effectively a table that outlines various ownership figures in the company.
Is venture capital a long-term source of finance?
This depends on the scenario. In many cases, venture capital is an early-stage form of funding. But some companies do continue to seek funding through venture capital throughout the life of the company. Most companies seek a wide range of funding sources.
Do I need venture capital?
This depends on the company that you own. If you can't obtain traditional financing for your company, there's a high chance that you need to seek venture capital investment if you want to get your organization off the ground. Most venture capital investments are in companies that are high-risk and early-stage.
What venture capital firms look for?
Venture capital firms look for companies that have a chance of success. They want to understand the business model and have faith that the management team is able to secure the growth of the company.
When to seek venture capital?
This will depend on your business and its personal circumstances. If you can't obtain financing from a traditional source, it may be a good idea to seek out funding through venture capital.
How does venture capital help a business?
Venture capital helps a business by providing the necessary funds to help it expand during the early stages of its growth. If a business doesn't have capital, it won't be able to grow. Some venture capital firms will also assist by providing their clients with advice and help throughout the life of the company.
Is venture capital different from private equity finance?
Venture capital isn't different from private equity finance because venture capital is actually just a type of private equity finance.
Who needs venture capital financing?
Startups or high-risk companies that don't have the ability to source funding through traditional means are typically the types of businesses that need venture capital funding.
What are the advantages and disadvantages of venture capital?
The primary advantage of venture capital is that it provides companies with the money they need to grow their operations and expand their current capabilities. Venture capital provides funding in instances where it may be too hard to obtain traditional funding. The primary disadvantage is that it means that you have to sell part of your company to investors who then have partial control of your operations and decisions.
Is venture capital internal or external?
Venture capital is considered an external source of funding.
How many venture capital firms are there in the world?
There's no way of knowing exactly how many venture capital firms there are around the world, but it's thought there are over 4,000 current venture capital firms in operation. There are around 1,000 venture capital firms in the United States alone.
What is corporate venture capital?
Corporate venture capital is slightly different to other forms of venture capital. In corporate venture capital, a corporate company invests its own money into an external startup or business.
How do venture capital firms operate?
Venture capital firms operate by investing their funds into startups or early-stage businesses that have the potential to return serious amounts of cash. The idea is that these firms are able to provide funding to companies that can't obtain funding through traditional lenders.
Is venture capital private equity?
Yes, venture capital is considered a division of private equity.
What is venture capital in entrepreneurship?
Venture capital is a form of investment that targets start-ups and other early-stage businesses that need investment to grow their operations. Instead of lending money, venture capital firms purchase equity in companies.
What is an angel investor vs venture capital?
An angel investor operates in a similar way to a venture capitalist, but an angel investor is typically a single investor where a venture capital fund is a fund made up of large amounts of other people's money. In most cases, venture capital provides larger investment amounts than angel investing.
Is venture capital long term?
This depends. In some cases, a business may only receive venture capital when it first starts operating. In other cases, a business may continue to seek funds throughout its lifetime to improve performance and increase growth.
What is risk and venture capital?
The risk associated with venture capital is very high. Because venture capital funds look to help startups and high-risk businesses, there's a high chance that the investment fails. They counter this risk by investing in a broad range of companies. The hope is that the returns outweigh the losses.
As you can see, there's a lot to learn about venture capital. It's an extremely interesting industry that has provided a lot of valuable funding to early stage businesses. Much of the startup community would not be able to thrive without the help of venture capital. If you want to obtain venture capital for your startup, it's essential to know as much about the industry as possible.
Remember, most business owners have to find a wide range of new small business loans when they start a new company. Venture capital may be one of many different funding sources you tap into when you create a new company. Either way, it's essential to be prepared if you're making a pitch to a venture capitalist. These companies receive large amounts of funding requests – you need to be able to stand out from the pack.
If you have any other questions about venture capital or related industries, make sure to check out the other resources on our site. We provide business owners with excellent content that can help improve understanding of certain key topics.
Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state.