How Venture Capital Raises Money?

All businesses come to life from great ideas. It takes a lot of effort to get a business functioning. One of the most important factors that bring the business to life is the capital investment. It is the life source of any business. There are many high potential businesses that often require large sums of capital, but entrepreneurs often find it impossible to raise such large sums of capital, which usually are in the millions.  It is at times like these where people rely on the option of raising capital and funds through venture capital. Venture capital had come into existence from the first half of the 20th century. Venture capital simply put, is the financial aid or initial financial capital provided by various venture capital firms to various business in its early stages. These businesses are mostly high potential, high risk and high rewarding ideas. The capital provided helps in the start up, expansion and growth of a business. Venture capital fund providers earn money by investing in a business in return for the ownership of a certain quantity of equity shares of the business. The favorites among the venture capital firms are technology and software based business. Venture capital funding in short is nothing but raising private equity by a business, but all private equities are not necessarily venture capital funds. Venture capital fund raising is an attractive and feasible option for companies with limited operational history and firms which are too small to raise sufficient capital through issuing IPOs in the public markets. It also becomes a reliable option when smaller firms are unable to secure a bank loan or avail capital through debt offerings in the markets.

There are many venture capital firms that accept the risks of the business and invest in the company. In exchange for the investment and acceptance of the risk, these companies usually get a significant control over the businesses decisions and executions. They also have a good portion of the business’s ownership and value. There are many entrepreneurs who often wonder how venture capital raises money? The process of Venture capital fund raising is significantly different from raising loans or from other debt instruments from lenders. Lenders have the right to avail a certain rate of interest from the company for the money they have lent regardless of the business succeeding or failing. However, there is no such interest payable to the venture capitalists.

Venture capitalists receive a major amount of ownership of the company by acquiring equity stakes of the company. This way, venture capitalists are nothing but shareholders of a company. Their profits and growth is dependent on the performance of the business they have invested in, and the performance of the business’s share.   Therefore, there are various factors that venture capital fund companies take into consideration before investing in a business. Venture capital companies are often very selective about the companies that they invest in. They look at various aspects such as the feasibility of the project, quality, innovation and potential for rapid growth. There are many people who often get turned down by these companies because of the lack of preparation and planning. Venture capital fund raising can be a very difficult task for most new businesses are venture capitalists fund hardly one out of many hundreds available. Many businesses are rejected because of a poorly written business plan for the future. The business plan must explain in detail regarding the company’s plans and ideas for the growth and development in the future and where it is expected in the near term. Every new business must provide all information and details of the products and its estimated future with a great amount of accuracy.

As the returns of the venture capitalists is dependent on the successful functioning, growth and development of the company it has invested in; they take all measures to assist the company in various areas. There are basically four stages where venture capitalists partner along with the businesses. They are, Idea Generation, Start Up, Ramp up and Exit. Idea generation is where the company helps in improving the idea and making it more feasible. Start up is the process where company is established and functional in all areas. Ramp up is the stage where the venture capital arrives at the point where they have achieved the desired profit range. The last stage is where the venture capitalist exits by selling all the shares they own to the public, this way they also give up their ownership of the company. The shares are usually sold to the owners of the company.  This way venture capital fund raising is one the best option for any company, as there is very little risk involved for the capital invested. However, obtaining funds can be a very difficult task. The business must meet up to the demands of the venture capitalists. It is because of this, entrepreneurs must choose the right type of venture capitalists who are interested in a particular area of business.

About Sachin Ramje 19 Articles
Sachin, a blogger and web enthusiast having years of experiences both as an entrepreneur and investment banker. He loves to track startup ecosystem and writes about Venture Capital, Private Equity, Startups & Entrepreneurship. Fundgator is his new startup which helps startups to obtain funding from different sources.

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