Venture capital is the term used when investors buy part of a company. A venture capitalist places money in a company that is high risk and has the possibility of high growth. The investment is usually for a period of five to seven years, after which, the investor will expect a return on his money either by the sale of the company or by offering to sell shares in the company to the public. There are three different types of venture capital investment: early stage, expansion, and acquisition financing.
When investing venture capital, the investor may want receive a percentage of the company’s equity and may also wish to have a position on the director’s board. An investor who agrees to place capital in a company is looking to make a healthy return, so he can demand repayment by the sale of the company, asking for his funds back or renegotiating the original deal.
Early stage financing includes seed financing, start-up financing, and first stage financing. Seed financing refers to a small amount of capital given to an entrepreneur or inventor who wants to start a business, and it may be used to build a management team, for market research or to develop a business plan. Start-up financing refers to money that is given to a business that has been operating for less than a year, so their product will not have been sold commercially yet. First stage financing is used when companies wish to expand their capital and to proceed full scale and enter the public business arena.
Another type of venture capital investment is expansion financing, which 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 feet. The company is trading and has growing accounts and inventories, although it may not yet be showing a profit. Third stage financing is an investment to companies that are breaking even or becoming profitable, and it is used to expand the business, often for projects like acquiring real estate or furthering in-depth product development.
Bridge financing covers a variety of different meanings, and it 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 investor wants to liquidate his position and sell his stock.
Another common form is acquisition financing, in which the investment is used to acquire a percentage or the whole of another company. Venture 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.