by Peter Hann

Created on: September 07, 2010   Last Updated: September 15, 2010

Venture capital is the seeding or growth capital needed by start-up enterprises to finance their initial expenditure in developing a product and bringing it to market. The venture capital investor acquires equity capital in the start-up company and may wish to play a part in the management of the company. Even if the investor is not actively involved in managing the company he will carefully monitor the business decisions made by the entrepreneur, and intervene if necessary to protect his investment.

A venture capital investor will look at the business plan of start-up companies that need funding to help them expand. The investor will also look at the technical and business skills of the entrepreneurs involved in the start-up enterprise. Funding will be given to the company in exchange for a suitable share of the equity that reflects the investor’s assessment of the value of the enterprise.

Categories of venture capital

 “Seed” capital is initial capital that will allow a new enterprise to develop a business idea. The capital will be needed for drafting the business plan, developing a model or prototype and paying for additional research and development. The seed capital will often be supplied by venture capital funds or by angel investors.

“Start-up” capital is generally aimed at funding development of a product and bringing it to the market. The enterprise receiving start-up capital will not yet have begun selling its product on the market.

“Growth capital” is development capital provided to fund the expansion of a company that is making sales but needs to expand further. The funding would go towards expanding the assets, completing product development or ensuring that working capital is adequate.

Venture capital investors

An entrepreneur may be in a position to put his own capital into the start-up, not needing to look for capital from the outside and keeping full control of the enterprise. Where this is not possible, another source of capital may be family and friends, who may be willing to take a shareholding in the company without interfering in the management of the enterprise. This leaves the entrepreneur free to develop and grow the business.

Where these sources of capital are not available, the investor may try to keep control of the enterprise by looking for funding in the form of a bank loan. However the bank will generally need security, to be provided from the entrepreneur’s personal assets,

• 1
• 2
• Next Page >>