Venture capital is a term that’s frequently thrown around when the discussion turns to getting new ventures off the ground. While most know that it’s a source of funding, not everyone knows exactly its inner workings.
Simply put, venture capital is private or institutional investments made into early-stage businesses (startups) that are believed to have long-term growth potential. It is high risk high reward investing, where the investors generally finances or invests in a business in exchange for an equity stake in the business.
The people who invest are called Venture Capitalists (VCs) and they seek out businesses to fund looking to achieve a favourable return on their investments.
Typically there are 4 to 5 different stages or rounds of funding. To illustrate, if you are a new business with an idea for a new disruptive online solution, you will not be approaching a VC for growth financing, instead you will be pitching for seed financing. As the name suggests, a seed round is an injection of capital needed to bring the idea (or the seed) to fruition. Only once you have tested the market and have paying customers coming back for more, will you again approach VC’s for growth financing.
Take note that different VC’s have different risk appetites and mandates. Some are willing to take the risk and invest in an exciting idea and some only once you have market validation, paying customers and need capital to grow.
As it is a high-risk high reward arena, VC’s (with the upper hand due to their experience), want to ensure their investments are as safe as possible and they negotiate accordingly. As a business owner, you need to be fully aware of the all the negotiation tactics, terms and VC lingo which may be flung your way.
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