Adequate funds are necessary to build a business. Venture capital has become a popular way to acquire such funds. It basically is a type of private equity financing provided by investors to startups and small businesses expected to have high growth potential. Earlier, Anand Jayapalan had pointed out that venture capital is a critical component of the startup ecosystem, as it allows them to effectively develop their products and services, scale their operations, and ultimately become industry leaders.
Venture capital sources typically comprise of high-net-worth individuals, institutional investors, and investment banks. Unlike conventional bank loans, venture capital is an equity investment. This basically means that the investor assumes the risk of the investment in exchange for a portion of the company’s profits, if the company succeeds. As venture capital allows entrepreneurs to raise money without incurring debt, it is a prominent form of investment for startups.
There are many ways venture capital helps startups, including:
- Access to capital: Access to capital is one of the prime benefits of venture capital. For startups, this capital is extremely vital for the development, growth and expansion of business. Startups may use the funds they need from venture capital to develop and market their goods, hire staff, and grow the business.
- Industry expertise and connections: Venture capitalists bring a lot more than just money to the table. They provide valuable industry expertise and connections as well. A lot of venture capital investors are likely to have expertise in a specific industry, and can provide entrepreneurs valuable advice and insights. Entrepreneurs would also get the opportunity to access the expansive networks of contacts that venture capital investors generally have, including new suppliers, collaborators and clients.
- Validation and credibility: Obtaining venture capital may provide startups with much needed credibility and validation. Venture capitalists generally invest in startups they believe have higher odds of succeeding. As a startup receives funding from a prominent venture capital firm, it might signal to other investors, customers, and partners that the business is a promising and reasonable investment opportunity.
- Flexibility: Venture capital is quite a versatile form of financing. Traditional bank loans usually have strict repayment schedules and require collateral. On the other hand, venture capital is an equity investment that does not require repayment. Therefore, with venture capital, startups enjoy superior flexibility in regard to using the funds they receive.
- Venture capitalists put emphasis on investing in startups that can provide them with high returns down the line. They invest in early-stage companies with high growth and profitability potential. In case a startup is successful, the investor can expect quite a considerable return on their investment.
Earlier, Anand Jayapalan had discussed how the venture capital funding process ideally starts with begins with fundraising, where entrepreneurs raise capital from multiple sources. Those who fund these ventures are called venture capitalists, and play an important role in supporting entrepreneurs throughout the investment process. These venture capitalists may take an active role in the management of the company, serve on the board of directors and provide mentorship to drive growth and maximise returns.
