Venture capital is, strictly speaking, a subset of private equity and refers to equity investments made for the launch, early development, or expansion of a business. Venture capital provides long-term, committed, risk sharing equity capital, to help unquoted companies grow and compete.
It seeks to increase a company’s value to its owners, without taking day-to-day management control. Owners will need to sell some shares in their companies, generally a minority stake, to the venture capitalist, who may seek a non-executive board position and attend Board meetings.
Venture capital investors not only provide equity capital, but experience, contacts and advice when required, which sets venture capital apart from other sources of business capital.
Depending of the life cycle of the company in which venture capital invests, we distinguish between
– Early stage fund which is a venture capital funds focused on investing in companies in the early part of their lives. Early stage funds include Seed Funds which focuses on financing provided to research, assess and develop an initial concept before a business has reached the start-up phase. Other early stage funds are start-up funds which provide financing to companies for product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their product commercially. Other Early Stage funds focus on financing to companies that have completed the product development stage and require further funds to initiate commercial manufacturing and sales. They will not yet be generating a profit.
– Development/expansion fund which is a venture capital funds focused on investing in later stage companies in need of expansion capital. Typical Expansion funds focus on Financing provided for the growth and expansion of an operating company, which may or may not be breaking even or trading profitably. Capital may be used to finance increased production capacity, market or product development, and/or to provide additional working capital. Within this category, there are also funds focusing on Bridge Financing which is a form of financing made available to a company in the period of transition from being privately owned to being publicly quoted. We also have funds focusing on Rescue/Turnaround where financing is made available to existing business, which has experienced trading difficulties, with a view to re-establishing prosperity.