Small businesses with limited operating history fail to raise capital in public markets and banks. Venture Capital funding is a beneficial option for funding such businesses. The small and budding businessmen generally look for equity funding and loans for the start-up credit. However, venture capital funding is also a good option for funding their business.
Venture Capitalists
Venture capitalists are groups of investors who lend money to small companies which they think have the potential to grow. The investment is done with a hope of earning significant returns when the company grows and earns profits. Venture capital also involves job creation but in exchange for the risky money lending process to the small and less mature companies, the venture capitalists get a significant control over the company decisions and its ownership (and value). Venture capitalists are selective in lending money to particular companies with exceptionally high growth potential because they provide financial returns and successful exit event within the desired timeframe.
Funding
Investing in small companies involves a great amount of risk and the venture capitalists scrutinize the company’s application carefully before investing and select just a few from the applying companies. Venture capitalists also assist the companies to grow in the proper direction by guiding them on the idea generation, start-up, management and exit. Venture capital offers six stages of financing that roughly correspond to the different stages of development of a company. These include the seed money, start-up, early sales and funds, working capital for sales, mezzanine financing and the bridge financing.
Disadvantage
Taking loans from venture capitalists involves sharing the management. There is an interference with the management and decision-making procedures if the company isn’t doing well. This is one of the drawbacks of venture capital funding as it reduces the personal freedom for the company owners.
