Venture Capital

Definition
Money provided by investors to
startup firms and small businesses with
perceived long-term growth potential.
This is a very important source of
funding for startups that do not have
access to capital markets.
It typically entails high risk for the
investor, but it has the potential for
above-average returns.

More Discussion
Venture capital can also include managerial
and technical expertise.
Most venture capital comes from a group of
wealthy investors, investment banks and
other financial institutions that pool such
investments or partnerships.
This form of raising capital is popular among
new companies or ventures with limited
operating history, which cannot raise funds by
issuing debt.
The downside for entrepreneurs is that
venture capitalists usually get a say in
company decisions, in addition to a portion of
the equity.

Stages in venture capital

1. Seed Money:
Low level financing needed to prove a new idea.

2. Start-up:
Early stage firms that need funding for expenses
associated with marketing and product
development.

3. First-Round:

 4. Second-Round:

Working capital for early stage companies that are

selling product, but not yet turning a profit.
5. Third-Round:

Also called Mezzanine financing, this is expansion

money for a newly profitable company
6. Fourth-Round:

Also called bridge financing, it is intended to finance

the "going public process

Features of VCs
1. Venture capital investments are made in innovative
projects.
2. Benefits from such investments may be realized in the
long run.
3. Suppliers of venture capital invest money in the form of
equity capital.
4. As investment is made through equity capital, the
suppliers of venture capital participate in the
management of the company.

ADVANTAGES OF VENTURE
CAPITAL
Economy Oriented
Helps in industrialization of the country
Helps in the technological development of
the country
Generates employment
Helps in developing entrepreneurial skills

ADVANTAGES OF VENTURE
CAPITAL (contd..)
Investor oriented
Benefit to the investor is that they are invited
to invest only after company is perceived of
earning profits
Helps them to employ their idle funds into
productive avenues.

Disadvantages of VCs
It is an uncertain form of financing.
Benefit from such financing can be
realized in long run only.

Angel Investor v/s Venture Capitalist

Definitions: An Angel Investor is usually a high net worth
individual. VCs are typically formed as Limited Partnerships in
which the Limited Partners invest in the Venture Capital fund.
Size of Investment: Angel Investor usually spends 1/4 th
1/10th of the what VCs do spend in one project.
Due Diligence: Venture Capitalists have to do a lot more due
diligence than Angel Investors do because VCs have a
fiduciary duty to their Limited Partners.
Risk Returns:Angels are investing earlier than VCs and so
they have a higher risk to take into account.