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Venture capital (VC) is a form of private equity funding that is typically provided to start-ups and companies at the nascent stage. Earlier, Anand Jayapalan had mentioned that venture capital financing is becoming an increasingly popular option for early stage businesses as they tend to have limited operating history and poor chances of accessing capital markets or bank loans. VC is ideally provided to companies that show a considerable potential for revenue creation and growth, and hence provide potential high returns to the venture capitalists. A venture capitalist can be a sole investor or a group of investors who come together through investment firms.
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VC can be categorized as per the stage in which it is being invested. They can be of the following types:
Seed Capital: Aspiring entrepreneurs who want to establish a business but do not have a product or organized company yet can choose to seek out seed capital. There are certain venture capitalists ready to fund at this stage. Even though the funds can be in small amounts, they can help in establishing and supporting a business. Seed capital is commonly used for market research, making product samples and covering administrative expenses.
Startup Capital: At this stage, a business is likely to have a sample product available and require funds to develop a working prototype. Startup capital may also be used for recruiting employees, renting commercial property and conducting further market research.
Venture capital funding
Early Stage Capital: Such capital is meant for businesses that have been around for a couple of years. Businesses that have been in the market for about three years or so and already have a management team and a range of products that sell well find it fairly easy to attract VCs. Venture capital funding helps such businesses to grow their venture, expand in new markets, boost sales, as well as take steps to elevate company efficiency and productivity.
Expansion Capital: After establishing their business, an entrepreneur may look to a VC to help take their venture to the next level of growth. Funding at this stage can help in improving marketing efforts and entering new markets.
Late Stage Capital: Companies at this stage are likely to be well established, and have good sales and revenue. They may even have a second level of management. But entrepreneur may want to grow their business further, and hence avail late stage capital.
Bridge Financing: There are specific VCs that focus on initial public offerings (IPOs), recapitalizations, or purchases. In case a company is planning an IPO, the VC would assist with bridge financing. This is a form of short term financing where a business needs to pay for going public. they do not have to commit to a single vendor, rather they would be free to use several vendors for capacity upgrades based on their current needs.
Earlier, Anand Jayapalan had mentioned that venture capital firms essentially make private equity investments in disruptive companies with high potential returns over a long time horizon. The most common securities used by venture capital investors are convertible debentures and preferred equity. The securities a venture capital investor selects would largely depend on the stage of the business and its specific capital requirements.
