When a startup company needs capital for operating expenses and research, the answer is frequently a company or individual who will provide venture capital. This is particularly true of high technology industries. This capital fund makes its profit by owning equity in a company that has either a compelling business model or an innovative technology. Some of these high tech companies include computer software, information technology, and biotechnology. The venture capital fund’s return on investment is an eventual trade sale of the startup company or an initial public offering of its stock.
Many high tech companies, in particular, start out with great product concepts but limited operating history. Many technology wizards develop groundbreaking products or processes, but have little real-world experience in financing a new company. They may be too small to raise capital on their own. This makes venture capital funding very attractive. A VC company is willing to take on the high risk associated with startups and research/development. A significant portion of the value and ownership of the startup company may become the property of the venture capitalist.
Jobs are typically created when venture capital is used. Every year, throughout the world, millions of new businesses are created. Many of these obtain their startup costs from venture capital providers. At least a portion of the financing received is used to pay new employees of the startup company.
This capital is also responsible for constructing public and private sector networks that contribute to the success and progress of startups. These networks integrate the various components of a new company. Finance, marketing, business models, and technical expertise are brought together to form a cohesive, successful company. Venture capital plays a strong role in establishing networks that assist in this integration.
In the early days of venture capital and private equity, financing of a new company was typically the function of wealthy individuals and families. Throughout the world, innovators, researchers, and inventors would reach out to these wealthy people for capital. Many families of wealth provided funding for these new businesses. In some cases, that wealthy family’s name remains a part of the successful company’s name. As business startups became more numerous, venture capital firms were founded by these people of wealth. These venture capital firms encouraged private sector investment in many technology-driven companies of the 20th century. Venture capital investment is still a widely accepted, worldwide business model.
Historically, These captial firms have been focused on investment activity in technology startups. Technology finance and venture capital have become nearly synonymous terms. Many of the world’s largest technology companies, such as Apple, Genentech, and Digital Equipment Corporation, obtained their first financial backing from venture capitalists. Many of these startup companies were unable to obtain business loans because of their small size or their new, unproven technology. Venture capital providers not only provided funding but also took on the risks of a new business. Venture capital is not a loan. It differs substantially from lending because it provides financing in exchange for an equity stake in the new business or technology.
Venture capital investment in a new company usually requires six independent stages that roughly correspond to the new company’s development. The first is seed funding, which is nothing more than low-level funding provided by individual or group investors. This takes place when a new technology, for instance, is developed and further research is needed. Startup funding is for marketing and product development expenses. This happens in the early stages of a new company’s development, when employees are being hired and capital equipment is purchased or leased. Growth funding covers the monetary needs incurred in establishing early sales and marketing infrastructures. This funding is also in place for building the manufacturing capabilities of a new company. Working capital is almost exclusively provided for companies who have started selling their new product, but are not realizing a profit yet. A newly profitable company may be in need of financing for expansion; this is called mezzanine financing. Finally, bridge financing, or the exit of the venture capitalist, takes place when a company is ready to go public, with initial stock offerings. The V.C capital firm or individual then goes on to seek new technology or business opportunities.