What is Venture capital
Venture capital refers to investment that is used to finance a young company at risk of loss.
The term venture capital originally comes from the English-speaking world. Synonymous and the abbreviation VC are frequently used. The translation into German also indicates that VC represents an investment form which contains certain risk for the investors. An example may be that the capital injected does not multiply or even be lost altogether.
The venture capitalist
Venture capital is not a loan, but rather is seen as a form of development aid for a business idea. A so-called venture capitalist finances a young company with the knowledge that the company can fail and he loses his invested money. Therefore, venture capitalists choose their investments cautiously.
Venture capital and the risks
The goal of venture capital, of course, is to maximize the money spent. With the rule of thumb that out of ten deals, three of them must be very successful in order to achieve a good profit ratio. Venture capital therefore carries the risk of losing its investment but also the chance of getting back a multiple of its investment in a sale.
In most cases, venture capital deals not only provide funds, but also, unlike banks and credit institutions, logistical and non-material investor support. That is precisely why venture capital investors are a very important partner for young companies with potential.
The investment of venture capital can be introduced at different stages of the company’s development. Here we will talk about these so-called stages. The first and most risky stage is the seed funding, which will take place when the start-up is still in the Seed Stage.
This is followed by the early-stage financing, in which the invested venture capital is mostly needed for the activities after the completed product development. The subsequent later-stage financing is also often referred to as growth finance or expansion. The final stage is the exit, in which the shares in a company are either sold back to the founders or other financially strong investors who want to get into the company.