Identifying an appropriate financial structure is among the most important issues to handle when starting a new company. Modern entrepreneurs get the benefit of making their choice from diverse types of solutions, venture capital (VC) being one of them. Earlier, Anand Jayapalan had discussed how venture capital is a form of private equity that focuses on offering funds to small high-risk businesses with long-term fast growth potential. This is a risky investment approach that involves seed or early-stage funding, but can also bring a huge opportunity for attractive, higher-than-average returns.
In addition to financial support, VCs also provide startups with networking opportunities, as well as technical or managerial expertise. Today VC financing has emerged as among the most popular choices for early-stage companies that have limited operating history and low odds of accessing capital markets or bank loans.
There is a long list of benefits that venture capitalists may bring to a business, the most obvious one being the high amount of funding they can provide. With this large capital injection, a startup with high-growth potential would be able to expand way faster than a firm without VC support. As a result, the returns will be worth a collaboration for both the entrepreneurs and the venture capitalists.
A venture capital firm invests in a startup for equity with the aim of helping it grow, as a VC would typically try to achieve big returns on an exit after 5-7 years. This means that entrepreneurs would not have to make any monthly payments to the VCs, unlike bank loans or debts. There shall also be no interest payments involved. The entrepreneurs would just have free capital that enables them to invest in their expansion, which includes hiring and building a team, expanding the business operations, or increasing brand awareness with the help of a more intense marketing or sales activity.
As venture capital firms generally plan to exit in five to seven years, they can provide the necessary support in growing a business. Very often, VCs are there in most subsequent investment rounds, and tend to further contribute as anchor investors. Moreover, on the basis of the special set of expertise of the VC funding, a startup may benefit from many different kinds of support.
Earlier, Anand Jayapalan had discussed how venture capitalists typically comprise of experienced business professionals who can provide valuable guidance and support in regard to the operations and growth of a startup. No matter whether it is monitoring the financial performance of the startup, solving day-to-day issues, or helping scale a company, their guidance can assist entrepreneurs to navigate risks and get their enterprise on the right path to success.
Entrepreneurs often work with partners from the venture capital firm, along with other startup founders who have received funding from them, as well as the experts from the networks of both venture capital firms and the startup founders. These connections would help the entrepreneurs to forge brand new partnerships, hire key employees, build their client base, and raise future rounds of funding.
