What is Venture Capital

Venture Capital is becoming an increasingly popular way for bigger investors and companies to lend their expertise and access to smaller companies. For the start-ups involved the benefit is that oftentimes, they will not have to spend any money for the advice given. Instead, venture capitalists are offered equity in the company, which means that as an extension they will also get to be a part of many of the important company decisions in the years to follow.

Depending on the stage that each start-up is in, the level of technical or managerial venture capital that they would benefit from varies. Especially, during the first few stages of development having a good backing and people to guide them through meetings, creating a pitch deck, business plan, and marketing their company. It could also help start-ups decide on how their limited resources should be allocated to achieve the most during the early and seed round funding stages.

The Venture Capital process

Any business looking for venture capitalists will need to first create a business plan. The business plan is what will be submitted to venture capital firms and other potential angel investors. The proposal must exhibit all of the potential start-upholds, as well as create sufficient levels of interest in the industry. Any firm or investor thinking of lending their expertise to a company or start-up will want to find out in-depth information about the business model, products, and operating history of the company seeking their assistance. There must also be a direct link in the way that they will be able to assist, and how their expertise would help the company capitalize fully on the market potential.

Venture capitalists, especially when offering managerial or technical expertise will tend to focus on one specific field or industry. For example, venture capitalists specializing in the art industry will not offer their expertise to healthcare companies and vice versa. This is because there is a high level of prior knowledge and industry understanding required from venture capitalists.

Once the venture capitalist has found out enough about the start-up company and has determined how they can assist, they will want to enter a formal agreement in which their services will be exchanged for equity in the company. The investor or firm will also take an active role in advising, monitoring, and reviewing the progress the company is making with each round.

Typically, investors will also stay with the company for a short period after the initial agreement is forged. They are there to provide expertise for four to six years until the company has begun naturally growing on its own and their expertise is no longer as necessary. Any stock they have in the company remains theirs unless they choose to sell it upon exiting their position.

Any information is for illustrative purposes only, as well is not intended nor does it constitute financial, tax, legal, investment, or other advice

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