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External investment is an inevitable part of a growing business. Working capital is different from profit. Even if your business is generating profit, it may still need capital funding in order to realise its full potential. There are various sources of funding out of which venture capital funding is one of the most widely acclaimed. Here is all you need to know about VC funding.
People who invest capital in a promising venture are called venture capitalists. Venture capital can either come from a single investor or from a group of institutional investors and high net worth individuals who pool their resources together via dedicated investment firms.
Venture Capital funding is an external investment done in a startup or a small business that has potential to grow. With the right financial help, when these businesses grow, the venture capitalist enjoys massive returns on investment. Keeping the return on investment aside, VC funding can make a huge difference in the growth span of the business.
A correct business plan, in most cases, includes external finance options to fill the financial gap and ensure smooth business growth. Not only does VC funding add to the critical financial resources but the business expertise of the experts ready to help with their connections, business knowledge, and improvised decision-making, also helps the business.
Mostly, investment capitalist firms are large entities such as the pension funds, insurance companies, and financial firms. Together they put a small amount of their capital in a promising business. The expected return in future is somewhere around 25-30% per year over the total lifetime of the investment made.
The investment criteria of these VC entities with respect to the firm is largely based on the uniqueness and feasibility of the business idea, the track record of the company, and their confidence in the company leadership. But more than anything else, it depends on the industry.
VC funding depends a lot on the nature of the business and the industry trends. Usually, Venture capitalists are more inclined towards funding businesses pertaining to growing industries as the overall market condition also favors them. They focus on the middle part of the characteristic S-curve of the industry. Avoiding both, the early and the later stages, they focus on the middle stage i.e. the growing stage of the industry and if a promising business falls under this category, there are higher chances of venture capitalists funding it.
Once your business achieves the envisioned stage, there are various options to take an exit from VC funding such as promoter buyback options, mergers and acquisitions, and introducing IPO. Sale to another strategic investor is also an exit route from VC funding.
VC funding is a great option to expand business with a smooth financial flow and an effective business networking but it also costs the complete control and autonomy of the founder. For investors too, it possesses a risk that the business may or may not perform as expected. If the business investment fails, they lose all their money and the possibility of future profit as well.