Venture capital - what is it all about?

Small and medium-sized enterprises that operate on the growth market, have an idea for an innovative investment and are looking for funds for its implementation, should consider the possibility of using venture capital. It is a form of financing investment projects of entities from the SME sector, in the form of capital companies, with good prospects for the future. The capital in this case comes from large enterprises and is contributed to the company through the purchase of its shares or stocks. What exactly is venture capital support and why is it worth being interested in?

Features of venture capital financing

Venture capital, i.e. venture capital, has just such a name for a reason. The uncertainty of this form of financing results mainly from the fact that the funds entrusted by a larger enterprise to a smaller company are not a loan. Rather, it is an investment that will bring specific benefits to both parties in the future. However - as you know - each venture is burdened with risk and in case of failure, the investor can lose a lot.

A large company buys stocks or shares of a smaller company that operates in a growing market and shows great potential for development. The funds obtained in this way are allocated by an entity from the SME sector to a project that will increase the value of the company's shares in the future. Then the investor sells the already more expensive shares or makes a profit on the shares. Most often, the entire investment takes from 2 to 5 years.

Who is venture capital intended for?

Venture capital is intended for companies that have been operating on the market for some time, have a proven operating model and a high growth potential. Investments in new technologies are most often preferred - IT, Internet, telecommunications, biotechnology, etc. It is important for the owners of the investing company to see a great potential for development in the capital recipient.

Venture capital investors are looking for companies that have good management staff, show an advantage over the competition in terms of the offer of products, services or technology used. An advantage, but not a necessity, is to operate in a growing market and to have a significant share in it.

The idea for an investment to be financed with venture capital is also very important. A large company must feel that this idea has a chance of success and great potential.

Venture capital - what does the capital recipient gain?

First of all, a small or medium-sized enterprise gains capital for a risky investment, without the need to provide any security. In addition, venture capital also includes non-financial support. The company gains access to the know-how and knowledge of specialists. When an investor buys shares, he becomes a partner, thanks to which he monitors the company's operations and takes part of the investment risk. Companies large and small have one goal in common - to be successful and increase the value of the enterprise. Moreover, contributing the investor's capital positively influences the image of the supported company. For external entities, it is a signal that it is worth investing in.

As for the capital side of this type of financing - the company is not obliged to regularly repay the principal installments and interest, as is the case, for example, in the case of an investment loan. As a result, the value of the company grows, which at the same time has more money that can be spent on the implementation of the project and the pursuit of the goal.

Venture capital also has some disadvantages

The purchase of some shares by the investor is tantamount to a partial loss of control over the company. It is connected with the necessity of sharing profits, sharing power and taking into account the opinion of the partner.

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In addition, this form of financing usually means a fairly long period of acquiring an investor. It usually takes about 6-12 months from the moment of contact with venture capital to its entry into the company. This period is therefore much longer than in the case of raising capital with a bank loan.

It is also worth noting that venture capital is one of the more expensive forms of financing. You can get the wrong impression that its cost is low, as there is no need to repay the capital at first. However, when an investor exits, it often turns out that the company has sold its shares too cheaply because the company's value has increased several times. This will happen if the enterprise is successful. The real cost of capital should therefore be estimated at 20-30%. per year.

In summary, venture capital is a form of financing intended only for certain small and medium-sized enterprises. Companies that are just starting their activities, operating on a market that does not have a high growth potential or have a different form of activity than a capital company do not have a chance to take advantage of it.

Despite the many risks associated with venture capital, there are many companies that prove that this form of investment can give an investment "kick" and lead to the creation of a real giant. The companies that have used this form of financing include Amazon.com, Facebook and Google. Without the support of private investors and venture capital, the founders of these global brands would have a hard time turning their innovative ideas into business.