Venture capital(VC) is investing into the ideas of start up/small companies in which the investors believe a potential growth in future. VC is similar to private equity(investing into firms which are not listed in exchanges) and is often funded by a partnership firm of limited liability or investment bank or any other financial institutions and the investor is called as venture capitalist. Venture capitalists pledge their funds in exchange with the equity of the company and so they have rights to make decisions regarding company matters. Capital may be invested into the firm at seed or growth stages. The company do not return the investment to the venture capitalists and the capitalists will be benefited once the firm goes into public through IPO(Initial Public Offer) and so they earn good returns.
PROCESS OF VENTURE CAPITAL:
- The startup companies approach the venture capitalists with their ideas and business models.
- Venture capitalists use their due diligence and analyse the models of the company. If they believe the ideas work they will release the funds.
- The investment is made in full or in rounds.
- Venture capitalists often supervise the company performance.
- If they are satisfied with the performance they will release the next round funds.
How do Venture Capitalist differ from Angel Investor?
- Venture capitalists are a part of firm and they invests pooled money from large institutions into startups. Where as angel investor is an accredited investor uses their own money into small businesses.
- Venture capitalists works as a company and angels works alone.
- Venture capitalists invests huge amounts and angel investor’s investment is based on their own worth.
- Angel investors take more risk than venture capitalists.
- Angel investor is one who have great knowledge in entrepreneurship so the companies in which they are investing can get knowledge from them.
- Angel investors take larger stake in the company than venture capitalists.
- Angel investors only invest in the early stages of the firm and VC investment is based on the focus of the firm.
Difference between VC and Private equity:
VC is an investment in to small companies which has incorporated life of less than 2 years. Where as private equity is investment into well known companies with good finance system and have a great probability of higher returns. VC deals only with equity and Private equity deals with both equity and debt.