Venture Funding

Venture funding (VF) is a form of private equity funding that is generally provided to start-ups and companies at the nascent stage. VF is often offered to firms that show significant growth potential and revenue creation, thus generating potential high returns.

How Does Venture Funding Work?

Entities offering VF invest in a company until it attains a significant position and then exits the same. In an ideal scenario, investors infuse funding in a company for 2 years and earn returns on it for the next 5 years. Expected returns can be as high as 10x of the invested funding.

Financial venture funding can be offered by –

Venture Funding firms create Venture Funds – a pool of money collected from other investors, companies, or funds. These firms also invest from their own funds to show commitment to their clients.

When Should One Go for Venture Funding?

At the stage of expansion : If your next plan is to expand your business, opting for funding through venture funding is a good option. Doing so can help you encash their business, financial, and legal expertise which is usually required while business expansion.
Requirement for strong mentoring : A venture funding brings in a lot of expertise, knowledge, and networking along with his funding investment. You can utilize their guidance to build your own network, promote your business with their direction and ultimately make it reach bigger heights.
At the time of the competition : Once a start-up has gained a substantial reach and is most likely to face competition in the real market, it is the correct time to go for venture funding for surviving and giving tough competition to others.

Types Of Venture Funding

VF can be categorized as per the stage in which it is being invested. Generally, it is of the following 6 types –

Seed funding : As the same suggests, seed funding or seed funding is the funding invested to help entrepreneur(s) conduct initial activities for setting up a company. This can include product research development, market research, business, business plan creation, etc.
Seed funding may also be provided by the owners themselves or their family members and friends.
Start-up capital : Start-up funding is often used interchangeably with seed funding. However, there are minor differences.
Usually, business owners avail start-up funding after they have completed the processes that involve seed funding. It can be used to create a product prototype, hire crucial management personnel, etc.
First stage, first round or series A : First stage is provided to businesses that have a product and want to start commercial manufacturing, sales, and marketing.
Expansion funding : As the name suggests, expansion funding is the fund required by a company to expand its operations. The funds can be used to tap new markets, create new products, invest in new equipment and technology, or even acquire a new company.
Late-stage funding : Late-stage funding is offered to businesses that have achieved success in commercial manufacturing and sales. Companies in this stage may have tremendous growth in revenue but not show any profit.
Bridge funding : Also known as mezzanine financing, bridge funding helps a company to meet its short-term expenses necessary to create an initial public offering (IPO).

Features Of Venture Funding

Some of the features of venture funding are –

Not for large-scale industries : VF is particularly offered to small and medium-sized businesses
Invests in high-risk/high-return businesses : Companies that are eligible for VF are usually those that offer high returns but also present a high risk.
Offered to commercialize ideas : Those opting for VF usually seek investment to commercialize their idea of a product or a service.
Disinvestment to increase capital : Venture funding firms or other investors may disinvest in a company after it shows promising turnover. The disinvestment may be undertaken to infuse more funding , not to generate profits.
Long-term investment : VF is a long-term investment, where the returns can be realized after 5 to 10 years.

Advantages & Disadvantages of Venture Funding

Advantages

Help Gain Business Expertise : One of the primary advantages of venture funding is that it helps new entrepreneurs gather business expertise. Those supplying VF have significant experience to help the owners in decision-making, especially human resource and financial management. Business owners do not have to repay.
Entrepreneurs or business owners are not obligated to repay the invested sum. Even if the company fails, it will not be liable for repayment.
Helps In Making Valuable Connections : Owing to their expertise and network, VF providers can help build connections for business owners. This can be of immense help in terms of marketing and promotion VF investors seek to infuse more funding into a company for increasing its valuation. To do that, they can bring in other investors at later stages. In some cases, the additional rounds of funding in the future are reserved by the investing entity itself.
Aids In Upgrading Technology : VF can supply the necessary funding for small businesses to upgrade or integrate new technology, which can assist them to remain competitive.

Disadvantages

Reduction Of Ownership Stake : The primary disadvantage of VF is that entrepreneurs give up an ownership stake in their business. Many a time, it may so happen that a company requires additional funding that is higher than the initial estimates. In such situations, the owners may end up losing their majority stake in the company, and with that, the power to make decisions.
Give Rise To A Conflict Of Interest : Investors not only hold a controlling stake in a start-up but also a chair among the board members. As a result, a conflict of interest may arise between the owners and investors, which can hinder decision-making.
Receiving Approval Can Be Time-Consuming : VF investors will have to conduct due diligence and assess the feasibility of a start-up before going ahead with the investment. This process can be time-consuming as it requires excessive market analysis and financial forecasting, which can delay funding.

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