Venture Capital

Overview

Venture capital is private funding that is provided by investors to early stage, high potential, new, and expanding companies to develop new products or to grow into new markets. With the right strategy, products, management, and market conditions, venture capitalists can reap great benefits. Venture capital can be provided to a company in any industry. After developing a business model, innovative company owners can seek out venture capital to fund their projects.

How It Works

Before seeking venture capital, businesses must develop a formal business plan that outlines a company's vision, products, sources of revenue, and finances. Business plans should also include project timelines and goals. After completing a business plan, a company will be ready to approach venture capitalists.

The following describe types of venture capital:

• Start-up capital includes the funds necessary to launch a business. After a business launches, venture capitalists may then decide to keep funding the project.
• Second stage capital exists for companies that are already established and that want to launch new product lines. Second stage financing will require presentations, market research, and business growth projections.
• Third stage venture capital funds expansion projects for established businesses. Third stage capital is usually used for the purchase of equipment or real estate.

Benefits

Benefits exist for both businesses and investors. Businesses are able to pursue new ventures even when they do not have the money to do so. In the long run, these new ventures may substantially increase profits for the company. Investors have the potential to earn a considerable sum of money from a profitable business.

Costs

Costs go into planning, market analysis, research, and establishing new product lines. Legal counsel may be required to review formal documents and register businesses. After becoming profitable, companies will be required to pay commissions to venture capitalists.

Timing

The entire process from planning to implementation could take anywhere from a month to years, depending on the project's scope. Legal requirements may add additional time.