Venture capital is a form of early-stage financing sought by companies with high-growth ambitions and significant capital requirements. It is provided by venture capital companies or institutional investors rather than by individuals.
Venture capital is different from other early-stage investments like angel investing and “love money” (provided by family and friends) because it is less patient—or in other words, it has stricter payback terms.
Venture capital investors (VCs) seek equity ownership in the companies they fund, typically in the form of stocks or securities. Their goal is to sell that equity at a later date for a substantial profit or capital gain. They tend to be less interested in income-based returns on their investments such as dividends.
Companies that seek venture capital typically cannot access the funding they need through debt financing (traditional borrowing). They must be comfortable having outside investors who will take an active role in their management and who may want to exit quickly (sell their ownership share), usually through a trade sale (sale to a company in the same business or trade) or as part of an initial public offering when the company first sells its shares publicly.
VCs typically stay invested for seven to 10 years, and they offer companies expertise and networking connections in addition to money. They also help attract new investors and board members who can assist with strategic and financial planning and corporate governance.
VCs tend to invest in companies that:
- Are well positioned in high-growth markets
- Have highly engaged and well aligned management teams
As these criteria can be hard to meet, VC funding is less common than other types of investments.