Venture Capital

Defining Venture Capital

• Venture capital is the financial capital provided to early-stage high-potential start-ups unable to acquire the necessary funding through conventional means.
• For venture capitalists, the high risk of investing is offset by the potential of high returns.
• Venture capitalists typically spread out their fund over a number of investments so that returns from successful investments will outweigh the losses from failed ventures.
• Venture capitalists take an active role in a company's performance; guidance, expertise, and industry connections can be just as valuable as financial capital.

Advantages and Disadvantages of VC Financing

• With VC financing, companies can acquire large sums of capital that would not be possible through bank loans or other conventional methods.
• Venture capitalists provide expertise and industry connections that can be extremely valuable.
• Accounting and legal costs make securing a VC deal a difficult process. If a deal is secured, VC investors will be highly involved in deciding on the company's strategic direction.

IPOs

• An initial public offering is the first time a company's stock is sold to the general public on a securities exchange, transforming the company from private to public. Though unpredictable and potentially costly, IPOs give benefits like increased access to financial markets and more capital.
• Venture capitalists gain both financial returns and professional reputation from successful IPOs.
• For venture-backed companies, their VC investors often expect the company to go public within a certain time frame so that they can sell or distribute their holdings of the company and exit the investment.
• Venture capitalists protect their ability to sell shares by contracting for registration rights prior to agreeing on funding the company. Demand rights allow the investors to initiate an IPO, while piggyback rights allow investors to sell when the company initiates an IPO.
• If the IPO market is weak, this threatens the venture capitalists' chances of a successful exit. The VC investors may instead select a different method of exit, or they can wait and hope for the market to improve.

Key terms

• Initial public offering An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a company are sold to the general public.
• Initial public offering An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a company are sold to the general public.
• Registration rights A contractual agreement specifying conditions for registering shares of stock with the SEC prior to selling them on a security exchange.
• venture capital Money invested in an innovative enterprise in which both the potential for profit and the risk of loss are considerable.
• venture capital Money invested in an innovative enterprise in which both the potential for profit and the risk of loss are considerable.

Source: Boundless
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