What Is Venture Capital? Entrepreneurs face a lot of challenges when they first start out. Youth can work against you in a variety of ways unless you’re in the tech startup field. Of course, the biggest challenge is almost always funding.
Unless you happen to select a very low-cost franchise or you pick a kind of freelancing with minimal infrastructure needs, you almost always need outside investors.
Some people turn to family and friends. A few secure financing from a bank. The investment type people hear a lot about is venture capital.
Do you always ask, “What is venture capital?” Keep reading for a quick breakdown of venture capital.
What Is Venture Capital?
The term venture capital typically means that one or more outside investors provide investment funding for an early-stage business. In most cases, this means a venture fund provides the funding for a business.
A venture fund is a company that essentially manages money for wealthy individuals or potentially other companies. The fund specializes in early-stage companies and startups. Some funds will also help connect limited partners with relevant startups.
A venture capitalist is typically someone who helps manage a venture fund, although they typically have some of their own money invested in the fund. Occasionally, you will also see an individual who provides venture capital on their own.
How Does Venture Capital Work?
Venture capital isn’t a selfless act on the part of the individual or a venture fund. The venture fund makes the investment in exchange for a partial ownership stake in the company.
In most cases, it also means giving a leadership role in the company to the venture capitalist of someone of the venture fund’s choosing. Typically, it’s someone with some expertise in your industry.
The idea is that the funding will help the company grow or scale faster. Then, the venture capitalist will be able to recoup their investment from taking the company public via an IPO or selling the business to a corporation.
Private Equity vs Venture Capital
While venture capital is a form of private equity, not all private equity is venture capital. While venture capital keeps its focus on startups, private equity focuses on established companies.
Private equity investors look for companies in trouble that have repairable problems. The private equity investors essentially buy control of the company, fix the problems, and typically look for a buyer. You can learn more about private equity and venture capital here.
Venture Capital and You
Now that you can answer the question of what is venture capital, you can decide if it’s a viable option for you. Venture capital can help your business grow, but it comes at a price.
At a minimum, you give up a substantial ownership stake in your business. It also typically means that you give up at least some control over the decision-making, as you give up a seat on the board or a similar leadership role in the company.
Looking for more business finance insights? Check out the Finance posts in our Business section.
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