Venture Capital Investing is a term used when investors buy part of a company that is high risk and has a high growth potential

Venture capital is a term used when investors buy part of a company. A venture capital investor places his/her money in a company that is high risk and has a high growth potential. The investment is usually for a period of five to seven years. The venture capital investor expects a return on his money either by the sale of the company or by offering to sell shares in the company to the public.

Many people think of venture capital investors as wealthy financiers looking to fund small business start ups, but that's how you can describe angel investors. In reality, professionally managed venture capital firms are usually private partnerships or closely-held corporations with an available pool of money that comes from pension and endowment funds, foundations, corporations, wealthy individuals, foreign investors and the venture capitalists investors them selves.

When investing venture capital, the investor may want to receive a percentage of the company’s equity and could also wish to have a position in the director’s board. We need to remember that an investor who agrees to place venture capital in a company is looking to make a healthy return and that he can demand repayment by the sale of the company, asking for his funds back or renegotiating the original deal

Venture capital investors look to profit by investing into small businesses with a potential for huge gains.

They typically put money into businesses that regular banks won't finance because of the risk involved. The venture capital investors view a higher risk business model as a greater potential for a larger profit.

Most commonly, venture capital investors are generally interested in technology related companies that come out with a new products or a new invention that has great potential. Financing the acquisition of a business is another area that venture capital investors like to be a part of. They provide expansion capital for the business. 

Venture capital investors not only provide the funds needed for a business to succeed but they also often provide management assistance and help consult a business to ensure the highest potential for profitability. Financial networking is also made available to businesses that are funded this way.

Types of Venture Capital Investments

  • Early stage Financing includes seed financing, start-up financing and first stage financing.
  • Seed Financing refers to a small amount of investor’s capital given to an entrepreneur who wishes to start a business. It may be used to build a management team, for market research or to develop a business plan 
  •  Start-up Financing refers to a venture capital that is given when a business has been operating for less than a year. Their product will not have been sold commercially yet by that point and they will just be ready to start doing so.
  • First stage Financing is when companies wish to expand their capital and proceed full scale and enter the public business arena. 

Another type of venture capital investment investors look out for is expansion financing. This covers second and third stage financing and bridge financing. Second stage financing is an investment used to expand a company that is already on its ground. A company that is already trading; has growing accounts and inventories, which although may not yet be showing a profit. 

Third stage financing by investors is an investment capital funding to companies that are breaking even or becoming profitable. The venture capital by investors is to expand the business. It may be used in the acquisition of real estate or for further in-depth product development.

Bridge financing is a short term, interest only investment. It is used when company restructuring is taking place. The money can also be used if an initial venture capital investor wants to liquidate his position and sell his stock.

Basics of Venture Capital Investors

  • Venture capital investors finance new and rapidly-growing companies
  • Some venture capital companies will consider start ups while others want only young but established businesses
  • Venture capital investors take an equity ownership stake in the business
  • Venture capital investors often seek active management participation and may help develop products and services
  • Venture capital investors take high risks with the expectation of high rewards 

It can be difficult to obtain investors capital, but it is worth trying. Regular bank loans can be an option for you to obtain financing. If your business has been turned down for bank loans it could also point to the fact that you don't have any business credit scores established. Your credit scores are the first thing that a bank will look at to determine your businesses credit worthiness. It is important to have separate personal and business credit scores as well. Since your credit scores are the first thing a lending institution will look at, if you don't have good business credit scores they won't spend the time looking at your business model. It is a possibility that your business is not being financed because your business model is risky, but because you don't have solid business credit scores established.

Another common form of venture capital by investors is acquisition financing, in which the investment is used to acquire a percentage or the whole of another company. Investor’s capital can also be used by a management group to buy out another a line of products or business, regardless of their stage of development. The company they buy out can either be a private or a public company