Contact us whenever you need it!

phone

+1 855 997 0206

Contact Hours: Sun-Sat 8am - 10pm ET

LEGAL DICTIONARY

Venture Capital

What Is Venture Capital?

Venture capital (VC) typically refers to private equity financing that is given by investors to early-stage companies, emerging start-ups, and small businesses. It is usually provided by venture capital firms or funds to businesses that have been identified as having high growth potential.

Business factors that can signal high growth to venture capitalists commonly include increases in annual revenue, number of employees, or market share. Venture capital investments are usually made in return for equity or an ownership stake in the company.

This article explains the basics of venture capital and why it’s important for small business or LLC owners, start-up founders, and entrepreneurs. We’ll also take a look at how it differs from private equity and angel investors.

Why Is Venture Capital Important?

Venture capital is essential for new businesses that are looking to spread their risk of failure and have a higher chance of achieving success. Innovation is a crucial part of the US economy, so it’s important that entrepreneurs are incentivized to take on risky and cost-intensive ventures.

By taking on part of this risk, investors typically receive equity and voting rights depending on the amount of investment they provide to the company. Overall, VC capital enables start-ups to get their business going and fulfill their goals.

Because early-stage companies often have a high amount of uncertainty, venture capital investments face increased rates of failure in comparison to other types of funding. Usually, VC financing occurs after the initial “seed funding” round, in what’s known as the “series A round” or “series A funding”.

Venture capitalists normally generate a return when the company they have invested in sells shares to the public through an initial public offering (IPO), merges with a larger company, or is bought by another financial entity.

Download Your Free LLC Operating Agreement Template

Private Equity and Angel Investors

While they both provide money to young companies, private equity and angel investors are different types of financing that businesses can use to pursue a profit. Both these terms are also related to venture capital.

Venture capital is a subset of private equity, which involves making investments that provide capital to private companies for the advancement of new technologies, the making of acquisitions, or the bolstering of the business as a whole. It can also include the buying out of public companies.

Investors that partake in private equity are usually from an institutional or accredited background, often including corporations. They are generally able to give large amounts of funds in the long term and help the new firm by leveraging their professional networks and by providing expert guidance.

On the other hand, angel investors are wealthy individuals who invest in companies as part of a hobby or side project. They are less likely to provide the same level of counsel as venture capitalists.

Angel investors often invest at an earlier stage in the company's growth than venture capital firms, often before the start-up's business model has been validated. This means that founders looking to attract angel investors can often rely on a well-formulated business plan and a promising idea to obtain funds.

Helpful Resources:

Harvard Business Review - How Venture Capital Works

National Venture Capital Association - Official Website

Corporate Finance Institute - Venture Capital: How it Works

What Is Venture Capital?

Venture capital (VC) typically refers to private equity financing that is given by investors to early-stage companies, emerging start-ups, and small businesses. It is usually provided by venture capital firms or funds to businesses that have been identified as having high growth potential.

Business factors that can signal high growth to venture capitalists commonly include increases in annual revenue, number of employees, or market share. Venture capital investments are usually made in return for equity or an ownership stake in the company.

This article explains the basics of venture capital and why it’s important for small business or LLC owners, start-up founders, and entrepreneurs. We’ll also take a look at how it differs from private equity and angel investors.

Why Is Venture Capital Important?

Venture capital is essential for new businesses that are looking to spread their risk of failure and have a higher chance of achieving success. Innovation is a crucial part of the US economy, so it’s important that entrepreneurs are incentivized to take on risky and cost-intensive ventures.

By taking on part of this risk, investors typically receive equity and voting rights depending on the amount of investment they provide to the company. Overall, VC capital enables start-ups to get their business going and fulfill their goals.

Because early-stage companies often have a high amount of uncertainty, venture capital investments face increased rates of failure in comparison to other types of funding. Usually, VC financing occurs after the initial “seed funding” round, in what’s known as the “series A round” or “series A funding”.

Venture capitalists normally generate a return when the company they have invested in sells shares to the public through an initial public offering (IPO), merges with a larger company, or is bought by another financial entity.

Download Your Free LLC Operating Agreement Template

Private Equity and Angel Investors

While they both provide money to young companies, private equity and angel investors are different types of financing that businesses can use to pursue a profit. Both these terms are also related to venture capital.

Venture capital is a subset of private equity, which involves making investments that provide capital to private companies for the advancement of new technologies, the making of acquisitions, or the bolstering of the business as a whole. It can also include the buying out of public companies.

Investors that partake in private equity are usually from an institutional or accredited background, often including corporations. They are generally able to give large amounts of funds in the long term and help the new firm by leveraging their professional networks and by providing expert guidance.

On the other hand, angel investors are wealthy individuals who invest in companies as part of a hobby or side project. They are less likely to provide the same level of counsel as venture capitalists.

Angel investors often invest at an earlier stage in the company's growth than venture capital firms, often before the start-up's business model has been validated. This means that founders looking to attract angel investors can often rely on a well-formulated business plan and a promising idea to obtain funds.

Helpful Resources:

Harvard Business Review - How Venture Capital Works

National Venture Capital Association - Official Website

Corporate Finance Institute - Venture Capital: How it Works