What is venture capital?
It is funds invested by individuals or companies in the capital of other companies in order to make a profit and/or support the development of the business.
The investment will go hand in hand with a varying level of involvement in the management of the company. In addition to the financial contribution, the investor will generally give the company the benefit of their experience and networks.
The notion of venture capital is sometimes used in a more restricted sense. Venture capital refers rather to investments in projects with high growth potential, high risk and return and/or in which there is a dominant innovative and technological aspect.
The concept of venture capital does not usually include the entrepreneur's personal contribution.
Why turn to venture capitalists?
You will not always have the resources or the will to create the level of capital necessary for your company's activity alone.
One possibility in this case is to supplement your personal contribution with capital from outside investors (venture capitalists).
You must be aware that opening up your company's capital to outside investors can have significant consequences. You decrease your participation in the shareholder structure, which potentially impacts your level of control over day-to-day operations, the determination of strategic choices, etc.
What are the different types of venture capitalists?
As their names suggest, business angels are usually the first investors in a company, followed by venture capitalists and private equity firms.
- Business angels invest in early-stage companies with little or no revenue or customers. Start-ups could potentially access this type of investor with a well-developed business plan, a prototype or a minimum viable product (MVP). Of course, companies with existing revenue are not excluded from access to financing via business angels.
- Venture capitalists (VCs) typically invest in companies that have a proven business model, a large and rapidly growing customer base and a clear revenue strategy.
- Private equity (PE) firms invest when a company has moved beyond revenue generation and developed profitable margins and stable cash flows and is able to repay a significant amount of its contingent debt.