To get a better understanding of the other article on our blog, it is important to know exactly what venture capital is. The purpose of this article is to supply you with all the knowledge required to understand our other articles.
Definition Of Venture Capital
There are a lot of definitions of venture capital, it is hard to say what the best one is. Therefore, we have compiled the best two to help you better understand what exactly the definition is. The sources used for this section will be listed at the end of the article.
The first definition we will be sharing is a definition which we got from Investopedia. This is an online dictionary for business-related terms.
“A venture capitalist (VC) is a private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake. ”
The next definition we would like to present is from The Economic Times. Which is a very respectable news source regarding economics.
“Startup companies with the potential to grow to need a certain amount of investment. Wealthy investors like to invest their capital in such businesses with a long-term growth perspective. This capital is known as venture capital and the investors are called venture capitalists.”
Comparing the definitions
After analyzing the definition provided by these well-known sources. We can conclude that a Venture Capitalist is, the party which invest in start-ups that have the potential of growing at an enormous rate. As can be seen in the definition supplied Venture Capital is private equity. Which means that individuals with a lot of capital invest in these funds.
Stages of Venture Capital
There are five main staged of venture capital. These are the idea/seed stage, startup capital stage, the early/ emerging stage, expansion stage and lastly the pre-public stage. Most often a VC focuses on only one and at the most two stages.
Idea/ Seed Stage
This Stage as the name suggests is the stage where the company is more of an idea than a fully functioning company. These types of companies still have to prove there concept. They do not have an existing track record supporting their business plan yet. Therefore, investing in this stage is the riskiest for venture capitals. On the other side, this means that the potential return is also the biggest.
Startup Capital Stage
This stage is rather similar to the idea stage discussed prior. During this stage, a company starts marketing there product/service and begins acquiring customers.
The businesses in this stage usually have a finished product ready. This is why they can start acquiring customers. During this stage, start-ups use the raised capital to invest in market research or perfecting their product.
During this stage, a company has proven itself that it is able to be successful. Due to this in this round, they do not require capital to finalize ant design. Rather they put there raised capital towards scaling. They increase their marketing budget for more sells and in addition, they increase their production capability.
Another difference is that in this stage the amount of capital raised is usually a lot more than in the first two stages. This is simply because of that then end goal of this stag is way more costly than the other stages.
Companies in this stage have proven themselves completely. So why do they still require a VC? This is because the goal during this stage requires a lot of capital. Companies in this stage have proven themselves however they do not yet own a large amount of capital. In order for these companies to grow, they will have to go into additional markets or start selling different/ more products. This usually costs a lot of capital and that is where the VC comes in.
Pre public stage
This stage occurs when a company has a large amount of traction and has proven itself to the public/ investors. So once again the question arises why would they need a VC to jump in? This has various reasons, the two most important once are; reduce selling price and finance an initial public offering. Companies in this stage try to reduce there selling price in order to gain more market share. In addition, the initial public offering requires a lot of capital and expertise. Which some VC’s have a lot of experience in.