Understanding Venture Capital

Venture Capital is one of the most important aspects of the entrepreneurship process, but often times we’ve found that entrepreneurs don’t completely understand how it works. Here’s a short, but useful guide to venture capital so that you’ll be prepared.

So What Exactly is Venture Capital?

Venture capital is an essential source of money to startups, an investment which can be used to produce long-term growth dividends for investors. Venture capital is typically a high-risk endeavor for investors, but they often get influence in company decisions because of this extra risk. It’s obviously attractive to the startup because they get a large influx of capital to grow their business. And while it is a big risk for investors, there’s a high reward for a lot of startups that get venture capital; while 84% of high growth companies are not built with venture capital, some of the most successful- such as Facebook and Microsoft used venture capital to propel their growth. Surely, those who invested venture capital in Facebook and Microsoft are satisfied with their investment. Venture capital often provides very high rewards for investors, but it doesn’t come without a price- many startups don’t view the loss of control as a worthwhile price to pay for the capital they receive, and it can be tricky to tell when it is a fair deal for the startup.

Where does Venture Capital Come From?

Venture capital is an investment usually coming from an investment bank, private investors, or various other financial groups that group investments together. While typically monetary, venture capital can consist of compensation such as advice and management expertise. Typically, venture capital comes from a company or business rather than a single person- this is one of the main differences between venture capital and angel investment.

How Does One Get Venture Capital?

Venture capital is usually raised in rounds amongst various firms. The first thing any business must do when raising venture capital is to create and send a business plan to whomever they’re trying to entice to invest. If the business proposal interests the investor, the investor will investigate all aspects of the business, from the employees to the product. If everything checks out, the investing entity will proceed with more assurance that the business they’re investing in is worthwhile.

What happens once you have raised venture capital?

Once you’ve raised venture capital, your investors are going to expect some sort of return on investment. Depending on your goals as well as the state of the company, these goals will vary significantly, and there’s no standard for any company. The investing entity will be clear on where they want to see the business go, but they’ll be there to support you as well since you are all in the same boat and want to see the business succeed.

Feeling lost? Trying to obtain funding? We understand, funding your startup is difficult. Check out our FREE eBook: 7 Steps to Getting Funded, to get access to some great tips on the funding process.