Venture capital funding is an investment in a business that shows potential for high growth, whereas traditional funding (through banks, for instance) comes in the form of a loan that is available to anyone who meets the funder’s predefined requirements.
A venture capital definition that works
Venture capital by definition entails funds flowing into a start-up in the form of an investment rather than a loan. Controlled by an individual or small group known as venture capitalists, these investments require long-term growth potential. This source of funding typically entails high risk for the investor, but has the potential for above-average returns.
Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. The downside for small businesses is that venture capitalists usually get a say in company decisions, as well as a share in the equity.
Venture capitalists choose start-up or young businesses that have considerable potential for rapid and profitable growth.
Unlike banks and other lenders, venture capitalists frequently take equity positions. This means the SME doesn’t have to pay interest and principal instalments. Instead, they give a share of their company in exchange for the investment.
Venture capitalists traditionally seek out start-ups that display:
- Rapid, steady sales growth
- A proprietary new technology or dominant position in an emerging market
- A sound management team
- The potential for being acquired by a larger company or taken public in a stock offering, offering an exit option for the venture capitalist.
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