Venture capital organizations can an
important source of funding for
young (and, in some cases,
expanding or
troubled) businesses.
VC firms may make investments at several stages:
- The seed money stage, where an individual or organization has only an idea, but no funding to speak of. My sense is that these are not too common.
- The rather prosaically named second stage, after the business's founders have made as much use of possible of their own seed money and loan capital. This is probably the most common type of VC investment.
- The mezzanine level, after a business has matured and may be ready for an initial public offering (IPO). Investments at this stage present much lower risks to the VC group, as the underlying business is already on its feet.
Significantly, VC groups can provide more than financial resources: because they specialize in investing in businesses that may be at a critical juncture in their development, they may also be able to provide sage advice and guidance to a business's management. Consistent with this, many VC groups focus on investing in companies in one industry in which the group's principals have expertise.
Venture capital groups may be compensated in a variety of ways. Most frequently, their investment effectively buys a chunk of the business, and they become a major shareholder when the company makes its IPO. In some cases, the VC firm may opt for a share of the sales/royalties of the underlying business's new product or service.
In short, VC firms provide an important source of capital for businesses, filling the gap when banks are unwilling to make loans and the business is to small to offer its shares publicly.
Some material was adapted from
Barron's Dictionary of Finance and Investment Terms.