Venture capital is the term used when investors buy part of a company. A venture capitalist places money in a company that has a high growth. The investor will expect a return on his money either by the sale of the company or by offering to sell shares in the company to the public.
When investing venture capital, the investor may want to receive a percentage of the companys equity, and may also wish to have a position on the directors board. Always remember that an investor who agrees to place venture capital in a company is looking to make a healthy return. He can demand repayment by the sale of the company, asking for the funds back or renegotiating the original deal.
There are three different types of venture capital investment. Early stage financing includes seed financing, start-up financing and first stage financing. Seed financing refers to a small amount of venture capital given to an entrepreneur or inventor who wishes to start a business. It may be used to build a management team for market research etc.
There are many budding entrepreneurs who come up with bright ideas but lack the capital for the investment. Venture capitalists step in to facilitate and enable the start up phase.
When there is an owner relation between the venture capital providers and receivers, their mutual interest for returns will increase the firms motivation to increase profits.
Venture capitalists have invested in similar firms and projects before and, therefore, have more knowledge and experience. This knowledge and experience are the outcomes of the experiments through the successes and failures from previous ventures, so they know what works and what does not, and how it works. Therefore, through venture capital involvement, a portfolio firm can initiate growth, identify problems, and find recipes to overcome them.