Venture capital is a process whereby investors (either individuals or companies) invest in a company with a view to making significant returns. Venture capitalists can invest in all kinds of companies but this type of investment tends to be in start up businesses or in those businesses that want to diversify or grow in a specific way. Often venture capitalists will invest in companies that other investors will perceive as being a high risk in the hope of making higher returns than the norm.
Common types of venture capital investment include:
- Seed investment - here the money goes to help start up a small business from scratch.
- Start up investment - here the company will be in operation but will still be relatively young.
- First stage investment - here the company will be established but will want to raise money to take its products or services to market.
- Second stage investment - here the company will be already established but may need capital investment to expand.
- Third stage investment - here the company may be getting to the stage where it may show a profit but needs capital to expand further.
- Acquisition investment - here the venture capitalist will make an investment with a view to buying an established business (i.e. to fund a Management Buy Out).
- Bridge investment - here the company may need a short term investment of cash to achieve a particular investment. This may be given as a loan rather than as a standard venture capital investment.
Venture capitalists can get various returns on their investment. They may, for example, use the money that they invest as a means of getting equity in a company, they may plan to make money from the sale of the company when it is established or they may aim to have the company go public and to raise money through the sale of shares.
Some venture capitalists will invest money in a company but will let the management of the company run the business as they see fit. However, many will also want to keep an eye on how the company progresses or to take part in shaping its direction and activities and may take a board level position in the company to do this.