An Introduction: What is Venture Capital?
Are you a co-founder of an innovative startup with the potential for exponential growth?
Venture capital is an excellent option for financing ingenious startups. Especially those that need an injection of capital to disrupt an industry.
In 2020, high-growth startups raised more than $130 billion. In addition, more than 10,000 venture-based companies received an investment.
Understanding the basics of venture capital, and how it can boost a business, could be the make or break of a startup.
What Is Venture Capital?
Venture capital is a type of financing best suited for startups that promise quick and exponential growth.
The funds are in the form of private equity, where the investor receives a share in the business in exchange for capital (or expertise).
Venture capital is normally given by wealthy investors, investment banks, and other financial institutions. In general, the money is invested as part of a long-term relationship and involves high-risk for the investor.
Why Do Businesses Use Venture Capital?
Businesses use venture capital as a method of financing to meet the next stage of growth in their business plan. As an equity investment, businesses aren’t burdened by financial debt and benefit from industry expertise from investors.
If a business meets certain criteria, then it can benefit greatly from venture capital. The money invested to support entrepreneurial potential can be used immediately to fast-track growth.
Benefits of Venture Capital
The main benefit of venture capital is the financial assistance that allows the business to grow, but that’s not all. Sometimes, the investment comes in the form of technical and managerial expertise.
Other benefits include;
- Opportunity for rapid expansion of the company
- Valuable expertise and guidance
- Networking opportunities
- No obligation to pay back the money
- Venture capitalists are strictly regulated, therefore trustworthy
Obviously, these benefits are balanced by certain considerations. For example, the dilution of company control and ownership, and a competitive process to receive funds, are just a few points to consider. With these considerations in mind, it’s important to make sure that venture capital is the right choice for the business.
How Does Venture Capital Work?
Venture capital is pivotal in a business’s growth cycle. It is not intended as a long-term investment but rather a short-term injection of capital in exchange for equity.
The venture capital process can be summarized as follows;
- Prepare and submit a business plan
- Perform due diligence with the investor
- Assist with a thorough investigation of the company’s business model and operations
- The investor pledges an investment of capital in exchange for equity
- The growth phase begins
- After some time, the investor may exit the company (usually through a merger, acquisition, or initial public offering)
With this process in mind, there are a few key details to consider when contemplating venture capital, including defining your business goals and preparing your pitch documents.
Is Venture Capital Right for My Business?
Venture capital is not an effective financing solution for everyone. It involves a high-risk decision on behalf of the investors, and so the decision process is stringent.
In preparation for applying for venture capital, it’s important to consider whether the business meets the criteria.
Venture capital is best suited for businesses that meet the following benchmarks;
- The company requires a large amount of month for growth
- There is potential for industry disruption and rapid growth
- The company is innovative
- The company has equity to offer
- There is an opportunity for high return
Various venture capital firms may have additional requirements, such as a guarantee that they will be able to keep their original equity position and a defined liquidation preference.
Venture Capital vs. Other Financing Options
Venture capital has many unique benefits and methods that differentiate the financing options from others. Here are a few common financing routes and how they differ from venture capital.
Invoice factoring provides cash flow support by purchasing invoices. Factoring also provides a financial injection as needed, but on a smaller scale. Rather than give a startup the large financial push to reach the next growth phase, factoring assists with slow-paying clients. As a financing option, factoring is faster and less restrictive than venture capital.
If a company needs expensive physical assets to be effective, then an asset-based loan is an alternative to venture capital. Money is loaned to purchase the assets. In turn, the assets are used as collateral. In comparison, venture capital exchanges cold, hard cash for equity in the business.
Lines of Credit
Business loans vary, offering the resources and flexibility needed to run (and grow) a business. While lines of credit allow a business to retain equity, the business may be subject to a credit check and the track record considered – which differs from venture capital.
Get Started With Venture Capital Today
At Intrepid Finance & Venture, we’re passionate about providing capital for business growth for a variety of different businesses, particularly those in the technology, transportation, and cannabis industries.
Apply for venture capital financing today, and boost your business growth.