Venture capital is a popular form of private equity funding. It is usually provided to startups and small businesses at the nascent stage. Typically, venture capital is offered to companies that show a significant potential for revenue generation and growth, ultimately delivering high returns. Earlier, Anand Jayapalan had discussed how venture capital firms create venture capital funds by collecting a pool of money from other investors, companies, or funds.
The reasons for using venture capital financing for a startup are many. Here are a few of them:
- Opportunity for growth: A company with good development potential is able to expand way faster with venture capital funding. Both entrepreneurs and venture capitalists reap the advantages of such endeavors. Entrepreneurs additionally have the propensity to raise venture capital multiple times, providing businesses with a much-needed access to a good amount of money that ultimately translates to growth.
- Convenient financing: In majority of the situations, the goal of a venture capital firm is to make major profits within five to seven years. Therefore, they tend to invest in businesses in exchange for shares, while intending to assist in the growth of the firm. This usually implies that venture capital companies do not compel business to make regular monthly payments unlike bank loans and other credit options. Rather, the businesses would get the capital to invest in expansion processes like hiring more employees, expanding the business, or raising brand awareness.
- Reduced failure with assessed risk mitigation: Venture capital can be quite helpful for startups with high-risk idea that requires support in the form of experience and/or money. A huge advantage of venture capital is that it allows for the planning and other processes of a startup to be overseen by an experienced team belonging to the venture capital firm, so as to lower risks and failures. Venture capital firms often offer support for legal hassles, as well as business modeling with in-depth market research. Their experts may also review legal negotiations and complex contracts.
- Anchoring support in the long run: Venture capital firms provide long-term assistance for business expansion and success. They commonly take part in future investment rounds of a startup to provide more funding as anchor investors. Depending on the particular set of skills possessed by the venture capitalist, startups can receive assistance in multiple spheres that contributes to their business growth.
- Opportunities to build connections and networking: Venture capitalists help startup entrepreneurs to capably identify new clients and partners, along with potential employers. They can even arrange future investment rounds with additional investors and open brand new opportunities for entrepreneurs among their networks.
The majority of venture capitalists choose to invest in sectors and industries where they have a good amount of knowledge and expertise. This can prove to be favorable for startup entrepreneurs as they can gain insights from seasoned professionals on how to grow the business, manage both common and serious issues, track financial performance, and so on.
Earlier, Anand Jayapalan spoke about how venture capitalists discuss the experiences of the various portfolio companies and may even assist in the development new partnerships among them, which is advantageous to all concerned.