What is a Venture Capital Company?
Venture capital is a type of private equity and financing that investment companies and venture capital companies, like Teoh Capital, provide to small businesses and start-up companies that have long-term growth potential. The fund comes from financial institutions, investment banks, and well-off investors.
Venture capital doesn’t necessarily take a fiscal or monetary form. It is also provided as managerial or technical expertise. Venture capital is not available to all small companies as the issuing institution evaluates the growth potential of the business before funds are released. Investors also fund businesses that have recorded tremendous growth and look poised to achieve more.
Although capital investment is sometimes considered a risk for investors due to the unpredictability of the business terrain, the profit potentials are very attractive. Venture capital is fast becoming an essential source of raising business capital especially for companies that do not have access to organized capital markets.
If you live in South Africa and are looking for ways to fund your business, you can search for an investment company in South Africa to help with the funding. Furthermore, to help you have a good understanding of venture capital, we have outlined some tips in this article to guide you. Please read on as we explain more.
Processes of Venture Capital Funding
Here are some of the processes involved:
This is the point when a business plan is submitted by the startup. This should contain an executive summary of the proposed business. Additionally, the market size and potential should be discussed in detail. Other details will include financial projections, expected and existing competitive scenarios.
When all the required information is provided, the issuing financial institution will run a detailed analysis to determine the suitability of the business.
This stage varies according to the kind of proposal submitted. It involves the resolution of queries related to business strategy, customer references, management interviews, and product evaluations. It also involves the exchange of information to find out more about the proposed business.
Term Sheets and Financing
After the due diligence phase, the venture capitalist comes up with a term sheet if the business is deemed satisfactory. The term sheet is a non-binding contractual document detailing the conditions of the agreement. It is negotiable and needs to be agreed on by all the parties involved before it can be considered to be valid and binding.
The funds are provided after all the legal documents are signed.
Types and Stages of Venture Financing
The different types of VC are grouped by the different phases of a business. The three major types include early stage, expansion, and buyout financing.
The stages of funding a business include the following:
This is low-level funding for fructifying and proving a new concept. It is given to unique businesses that are developing or have developed something that’s out of the norm. Investors provide this capital in exchange for a convertible stake or an equity stake in the establishment.
You can get more information about seed funding here: https://en.wikipedia.org/wiki/Seed_money.
This is funding provided for new firms that need funds to cater to expenses bothering on product development and marketing.
This is a fund provided for early sales and manufacturing. Companies seeking to boost their first output can utilize these funds.
This is also called Mezzanine financing. It is the fund used in expanding a new beneficial company.
This also known as called bridge funding. It is usually used to finance the last process which involves an introduction to the market.
Benefits of Venture Capital
The following are some benefits of this fund:
- They bring expertise and wealth to the establishment.
- Large sums of equity finance are provided.
- It also gives valuable information alongside the capital.
- The establishment is not liable to refund the money.
These are some benefits of this type of funding. However, it is not without some shortfalls and we have also outlined some of them in this article. You can find them below.
Shortfalls of Venture Capital
Here are some shortfalls of this fund:
- The control and autonomy of the establishment are lost immediately after the investor’s funds are accepted.
- It involves a complex and lengthy process.
- It is not a guaranteed form of funding.
- The proceeds from the funding are realized after a long time.
These are some shortfalls of VC. If you feel it is not a viable venture and you want to explore exit routes, you can check the options below.
Exit Route for Venture Capital
The following are some exit options:
IPO refers to the initial public offerings. It means that a private establishment is transitioning from private ownership to public ownership. Investors usually wait for the best time to run an IPO so they can get the best return on investment (ROI). You can find more information about IPO here.
Acquisitions and Mergers
This option involves merging two establishments or total acquisition of an establishment by a more buoyant company.
Sale to another Investor
This simply means a transfer of investment. When this happens, another investment company takes charge of every aspect of the transaction, including profit and losses.
These are some important tips to note about venture capital. If you are seeking alternative methods of funding a business, you can check out the options below.
Alternative Methods of Financing a Business
Here are some options to consider:
Personal/ Partnership Funding
If it is your business, you can fund it with personal savings and in the case of a partnership, the partners can contribute funds to reach the financial goal.
Viable business proposals can go for public funding. Setting up a crowdfunding account is usually procedural but when all the requirements are met and the request is given adequate publicity, the goal can be reached.
You can obtain loans from banks and other lending institutions. Before you consider this option, you need to study the terms and conditions properly to avoid repayment problems. Also, consider the viability of the business to repay the loan within the stipulated time. If it is not feasible, then you can consider other funding options.
Investors are constantly seeking out viable businesses that need capital to startup or expand. They achieve this through venture capital which is a form of investment in a business. We have outlined some tips to help you have a better understanding of this type of funding. And we believe that they would come in handy at some point in your entrepreneurial endeavors.