Venture capital is a phrase that gets thrown around a lot in start-ups. It’s one of those jargony terms that is so familiar and ubiquitous that you may even find yourself using it in a board meeting before realising that you don’t actually know quite what it means.
Then again, whatever working definition you have probably won’t be too far off the mark. Break it down into its component parts and you can make a pretty good guess at what venture capital is all about; capital that is used to fund a business venture of some kind. But in order to really understand venture capital and how it can benefit your business, we’ll need to get into a bit more detail than that.
The Basics of Venture Capital
Venture capital is a kind of business financing where an investor provides funding to a startup or small business with high growth potential. The investor could be an individual, a business, or a financial institution like a bank. Usually, venture capital is provided as hard currency, but it can take other forms. Training, advice, real estate, IT hardware or software – all of these can be shared by an investor in the hope that they will help the business achieve their potential and generate ROI.
How Is It Different to Other Kinds of Investment?
There is a common misconception that venture capital is only provided to start-ups during the early innovation phase. While this is one of the roles venture capital plays, it is definitely not what defines it as a concept. In fact, far more venture capital goes towards small business at the stage where their innovation is more-or-less complete and they are trying to market it.
The main thing that makes venture capital “venture capital” is that it is short-term financing given in the early stages of business development for a fast, hopefully sizable ROI. The idea is to find a business with high growth potential and invest in them just until they achieve the status that will allow them to catch the attention of a large corporation or investors from the private equity market. At this stage, the venture capitalist will sell their stake to an investment banker or other long-term investor at a substantially higher price than they paid for it.
Different Kinds of Venture Capital
Depending on your source, you will find venture capital investments broken down into any number of different types and subtypes. However, many of these definitions are splitting hairs, and since this is a beginner’s guide, there’s no need to inundate you with all of that. For our purposes, we’re going to stick with three basic types.
Type-one is Early-Stage Financing, which covers seed financing, start-up financing, and first stage financing. All of those terms have individual definitions that are worth knowing and you can find them with a quick Google search, but they all involve providing the funds that small, cash-poor businesses entrepreneurs need to get their idea up and running.
Type-two is Expansion Financing, where the investor provides the capital companies need to begin expanding once their basic infrastructure is in place.
Type-three is acquisition or buyout financing. This is an investment that allows a small business to acquire another, smaller company. Strategic acquisition of even a tiny company can increase the size of a business’s operations, add to the variety of their offering, and allow them to benefit from the cumulative experience and skills of acquired staff.
Curious About Exploring Venture Capital? Contact Think10
Venture capital is a mutually beneficial strategy that has helped countless small businesses to find their feet. Get in touch with Think10 today to find out how your business could benefit.