As a small business owner, you are likely to come across the concept of venture capital funding. As a good early financing option, venture capital financing can improve your cash flow and thereby support your business idea and innovation. This is why we've compiled this short guide to venture capital funding options.
Venture capital - explained
Venture capital refers to a type of financing that investors provide to small businesses and early stage companies with the potential to grow. In return, whenever venture capital funds a small business, the investor gets equity in the company. This means that the venture capital industry also is a type of private equity. Venture capital funding can be a great option for young businesses that might not attract funding from traditional and institutional investors. The way this works is that companies, banks, or private investors put their wealth into funds managed by a venture capital firm. The firm then manages the portfolio and matches them with small businesses to invest in.
Venture capital - advantages
Advantages for investors: Venture capital investors/ venture capitalists invest at quite a high risk - however, if the company succeeds, their venture capital investments can generate a very high profit.
Advantages for businesses: First and foremost, getting money through a venture capital deal is a great way to obtain early-stage business funding. Also, venture capital investment can help improve your business's infrastructure. Some venture capital firms offer eg marketing teams or in-house technology to help your company succeed.
Four stages of venture capital
Pre-seed and seed funding: At an early stage, venture capital funding is typically used to fund eg market research or product development. While your company might still be a prototype, this can help you get started. At this stage, angel investors and individual donors are likely to be your best bet for funding.
Series A funding: This stage becomes relevant once your company can prove its ability to scale up and generate returns within a relatively short amount of time. This stage is when you are likely to receive funding from venture capitalist firms.
Series B funding: Series B funding can become relevant for your business once you have developed and are looking at expansion. This means your business should be in the process of actively targeting a new audience, following a successful product launch.
Series C funding: At this stage, your company is perceived as a safe option to invest in. Your initial investors are likely to have had some returns, but you will still require funding for eg further product development. At this stage, groups like investment banks and private equity firms will be interested in funding your business.