Venture capital is a huge amount of money provided by investors, to a company in exchange of equities or shares. The investors are outsiders and not related to the company and are known as venture capitalists. There is a high risk of loss in such an investment but it brings a huge sum of profit too. It is desirable to provide funds for a rapidly growing company to increase its potential in an enormous way.
Venture Capitalists
- Provide funds to the newly emerging company
- Purchase shares from the company
- Provide assistance in the development of new services and products.
During a nascent stage, venture capitalists keenly notice the merits and demerits of the company, and based on this invest a small amount signing on for a long term relationship. This is called ‘early stage investing’. Later, they participate actively by increasing the amount of investment based upon the profit. This is known as ‘expansion stage financing’. Usually, they tie up with multiple firms at the same time, thus acquiring multiple funds simultaneously. Venture capitalists maintain the contract with the company in later stages by investing and providing support for the growth of the company.
Structure of Investment
There is a fixed duration for the investment and it can last anywhere between seven to ten years. The venture capitalist has a fixed duration signed with the company called ‘call down’. The early stage investment takes five years to complete whereas the later stage investment requires a period less than the previous one. Therefore, the investment cannot be short term in case of venture capitalists.
Types of Investments
In general, a majority of the investors avoid investing in new companies or start-ups. It is generally a risk to invest in such companies since there is no surety of profits. Such investments are called seed investments.
Certain investors have the policy of investing in new but growing companies and they finance the companies for its development. They are called early stage investors. In such investments, the security is relatively high since the pact is decided only after thorough examination of the company’s future goals.
Investments where the capitalist provides fund to a developed company just for maintenance and stock holds are known as expansion stage investments. As the name suggests, these investments are primarily made for the expansion of companies.
Later stage investments are made to maintain a good working relationship between the investor and companies in which investments have been made.
The tenure of investment may be for months to years. It depends on the policies adopted by both the investors and the companies. The real goal is to get back good returns in the form of interests.
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