Definitions
Venture capital is primarily a source of financing for start-up companies and new or turnaround ventures that involve investment risk but offer the prospect for above average future returns. It is also often called "risk capital" or “patient capital” and is usually provided by investors to privately held companies with perceived long-term growth potential. Venture capital financing often supplements other funds like traditional debt financing, that an entrepreneur is able to secure. Some venture capital firms provide financing for all stages of a company’s life-cycle. Alternately, others specialize in early stage or start-up funding for relatively new companies while some firms prefer to support established businesses needing expansion or growth funding.Private equity is a broad term that refers to an investment in a business in which the equity is not freely tradable on a public stock market or stock exchange. Generally, private equity is focused on investments in companies characterized by high risk – high return scenarios.
Key Characteristics
Venture capital and private equity investments differ from other conventional forms of financing. Firms that offer these types of investments develop active, rather than passive, relationships with their investee companies. Venture capital and private equity investors will typically anticipate a long-term relationship with the investee company and will also generally expect to hold a seat on the company’s Board of Directors. This type of involvement with management and boards of directors supports the investors’ primary objective: to add value to the investee company in order to generate a greater return than might otherwise be achieved without the investor’s involvement.Questions to Ask
Considering that these types of investment relationships are active and usually long-term in nature, companies who seek venture capital and private equity investment are encouraged to think carefully about who they choose as their financial investor(s). Some questions that companies may want to ask include:- What will be the scope and nature of participation by the financial investor?
- What percentage of ownership will be assumed by the financial investor?
- What added value might the investment firm bring to the company?
- What is the exit strategy and timeframe for the financial investor?
- What experiences have other companies had when working with this investment firm?