6 Things You Should Know About the Venture Capital Market
Venture capital funds are used by investors to provide financing to startups and companies which show potential for substantial growth in the future.
18:35 25 June 2019
This form of investing carries huge costs and high risks, therefore is usually reserved for big funds and financial institutions, e.g. investment banks.
How does it work?
Venture capital generally focuses on emerging companies which are looking for expansion opportunities thanks to the additional funding. Investing in early-stage businesses carries huge risks, but promises big returns should it succeed. In exchange for funding, the VC investors get shares of the company. To alleviate the risks venture capitalists often obtain the veto rights within the company.
How big are the investments?
The amount a VC fund will invest in a company will vary depending on the specific conditions and the negotiations between both parties. The typical early-stage investment is often between $1 million and $5 million. Though the final amount depends on the evaluation of the company’s value. Typically, the more money investors put into a business, the more say they’ll want to have in its operations to secure their situation.
When to use venture capital?
If you have a promising plan for the future growth of your startup and you’ve already exhausted all other possibilities of acquiring funding, venture capital might be a good option for you. Remember that VC funds don’t invest in a big number of companies. Since they take a big risk with no assurance of the returns, they tend to only invest in a few businesses a year, the ones with the bigger potential for future expansion. Getting venture capital funding will give away the decision-making rights to the investors, so it’s necessary to consider this part before signing any deal.
What are the benefits?
Venture capital doesn’t only provide your business with financial support. The investors have an interest in your company’s success so they’ll be willing to share their expertise and guidance with you. An outside look into the firm’s operations may help in finding new solutions and improve productivity. Venture capitalists generally have very versatile connections within the business community. Access to such connections can give your company new growth opportunities.
How much influence do investors have?
With the huge amount of money invested in your company, the investors will most likely want to have a say in the decision-making process. How much say exactly depends on the number of shares a VC obtained in exchange for funding. In many cases, they also require veto rights.
What is the return on investment?
Venture capital investments are long-term projects and because of the big risks associated with them, the investors generally expect returns of at least 25%. They often finance emerging companies and it takes time for such businesses to achieve a substantial level of growth. It usually takes up to 10 years for a VC fund to see any financial gains from the investment. This makes the market very illiquid and allows only wealthy parties to take part in it. This situation is slowly changing thanks to the use of blockchain technology. It enables the creation of secondary markets for tokenized VC assets like VNX Exchange, which helps bring liquidity to the funds and allow them to diversify their portfolios.
If you want to get venture capital to fund your company, consider all the pros and cons before making a decision. Look for funds that have experience in your industry, so that they’ll be able to best judge your situation and offer you better guidance.