Like angel investing, venture capital is a type of equity financing that involves giving up a portion of the ownership of business in exchange for money from investors. Venture capital (VC) firms are usually organized as partnerships. They raise money from institutional investors, such as pension funds and endowments, which the VC partners then invest in promising startups. This is a step up from angel investing. VCs can now be found in many areas of the country and a growing number of corporations have created venture investment arms as well, including Google, Dell, General Mills and Walgreens. Some of the biggest names in tech were backed by venture capital, including Google, Facebook and Uber. But overall, a tiny fraction—less than 1%—of all startups receive venture funding.
Although VCs are also focused on early stage companies, they typically are interested in a rarified breed of company—ones with billion-dollar market prospects and the potential to return 10 times or more the initial investment. Here’s a tip: don’t waste your time on venture capital unless you’re going for the big leagues.
- A venture capital investor can lend prestige and credibility to a young venture
- Hands-on approach, offering advice, contacts, mentoring and introductions that can help a young company.
- VCs invest large amounts of money—$1 million or more —which is good for capital-intensive companies
- Flexible use of funds without burden of paying down debt
- Forfeit sole ownership
- VCs look for an “exit” so they can recoup their investment, by an IPO or acquisition within 5 to10 years
- Time consuming: may be difficult to find
- VCs are focused on high growth opportunities and you may be pushed to grow faster than you like
- The personal stakes are high. If founders do not execute according to plan, they may find themselves out of a job.