WiseGeek:
Venture capital is the term used when investors buy part of a company. A venture capitalist places money in a company that is high risk and has a high growth. The investment is usually for a period of 5 to 7 years. The investor will expect a return on his money either by the sale of the company or by offering to sell shares in the company to the public.
When investing venture capital, the investor may want receive a percentage of the company’s equity, and may also wish to have a position on the director’s board. Always remember that an investor who agrees to place venture capital in a company is looking to make a healthy return. She can demand repayment by the sale of the company, asking for her funds back or renegotiating the original deal.
There are 3 different types of venture capital investment. Early stage financing includes seed financing, start-up financing and 1st stage financing:
Seed financing refers to a small amount of venture capital given to an entrepreneur or inventor who wishes to start a business. It may be used to build a management team, for market research or to develop a business plan.
Start up financing refers to venture capital that is given when a business has been operating for less than a year. Their product will not have been sold commercially yet, and they will just be ready to start doing so.
1st stage financing is used when companies wish to expand their capital and to proceed full scale and enter the public business arena.
Another type of venture capital investment is expansion financing. This covers 2nd and 3rd stage financing and bridge financing. 2nd stage financing is an investment used to expand a company that is already on its feet. The company is trading and has growing accounts and inventories, although it may not yet be showing a profit.
3rd stage financing is an investment to companies that are breaking even or becoming profitable. The venture capital is used to expand the business. It may be used in the acquisition of real estate or for further in-depth product development.
Bridge financing covers a variety of different meanings. It’s a short term, interest only investment. It’s used when company restructuring is taking place. The money can also be used if an initial investor wants to liquidate his position and sell his stock.
Another common form of venture capital is acquisition financing, in which the investment is used to acquire a percentage or the whole of another company. Venture capital can also be used by a management group to buy out another a line of products or business, regardless of their stage of development. The company they buy out can either be a private or a public company.
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