BROWSE

Venture Capital

Definition

Venture capital is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake, in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes that some of the firms they support will become successful. The start-ups are usually based on an innovative technology or business model and they are usually from the high technology industries, such as information technology, clean technology or biotechnology.

Venture capital is financial support provided by moneyed investors to small business that requires initial help when they are starting up.

Provision of Venture Capital

Venture capital is typically provided to those new businesses that have solid ideas and plans as well as high potential for long term growth. By large, Venture Capital is one of the most important sources of funds for fresh startups since they do not have the financial assets to be able to approach the capital markets.

While the risk for the investor is certainly higher, such risks are offset by the higher-than average returns they might be able to accrue. This holds true especially if it’s a revolutionary idea that has not been implemented before.

Advantages

For such firms, if the idea ‘clicks’, then being the market pioneers, they would be able to create their own value and charge as per their own demands. Even when newer entrants muscle into their field, they would still be able to keep a dominant position by virtue of their pioneering status and in this way the Venture Capital financer’s investment would be assured. Conversely, if the idea was to flop and the firm may become insolvent the financer would lose his investment.

Disadvantages

However from the startup’s point of view, since the firm is heavily beholden to its financer, it has no choice but to give him a say in all decision making activities. And this opportunity is usually availed by the financer who would try his level best to minimize the risk of losing his investment.

Potentially it could make or break the startup, since without full control of its idea and revenue generation capabilities it would be forced to listen to the ‘advice’ of the financer and might not be able to implement ideas as fast and as aggressively as it may want to do so.

Other more fell funded players may step into the field and the ‘pioneering edge’ would be lost for the startup. In the long run this would have negative consequences for both the business as well as the financer who, even if he does not lose his investment would not be able to reap the windfall that he had envisaged.


Further Reading


The structure and governance of venture-capital organizations
www.sciencedirect.com [PDF]
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between …

A control theory of venture capital financeA control theory of venture capital finance
heinonline.org [PDF]
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between …

Venture capital and the finance of innovationVenture capital and the finance of innovation
papers.ssrn.com [PDF]
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between …

The role of venture capital in the creation of public companies: Evidence from the going-public processThe role of venture capital in the creation of public companies: Evidence from the going-public process
www.sciencedirect.com [PDF]
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between …

Strategic venture capital investing by corporations: A framework for structuring and valuing corporate venture capital programs.Strategic venture capital investing by corporations: A framework for structuring and valuing corporate venture capital programs.
elibrary.ru [PDF]
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between …

The interaction between product market and financing strategy: The role of venture capitalThe interaction between product market and financing strategy: The role of venture capital
academic.oup.com [PDF]
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between …

Venture capital financing, moral hazard, and learningVenture capital financing, moral hazard, and learning
www.sciencedirect.com [PDF]
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between …

Financial contract design in the world of venture capitalFinancial contract design in the world of venture capital
www.jstor.org [PDF]
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between …

Convertible securities and optimal exit decisions in venture capital financeConvertible securities and optimal exit decisions in venture capital finance
www.sciencedirect.com [PDF]
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between …

Venture capital in Europe and the financing of innovative companiesVenture capital in Europe and the financing of innovative companies
academic.oup.com [PDF]
Venture-capital organizations raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk. This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationship between …



Q&A About Venture Capital


How can you minimize the risk of losing your investment?

By minimizing the risk, you can increase the chance of success for your startup company.

What happens if an idea fails to click?

If an idea fails to click, then it could be disastrous for a startup company since it would not have any revenue coming in from its product or service and may go bankrupt without any means to pay back its creditors (including investors).

What does venture capitalists do with their investment?

Venture capitalists invest in small businesses that need initial help when they are starting up.

Why do some startups fail?

Some startups fail because of a lack of funding and poor management skills.

What is venture capital?

Venture capital is financial support provided by moneyed investors to small businesses that require initial help when they are starting up.

Who provides venture capital?

Moneyed investors provide venture capital.