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Venture capital is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. However, it does not always take a monetary form; it can also be provided in the form of technical or managerial expertise. Venture capital is typically allocated to small companies with exceptional growth potential, or to companies that have grown quickly and appear poised to continue to expand.
The venture capital funding process typically involves four phases in the company’s development:
There is detailed analysis done of the submitted plan, by the Venture Capital to decide whether to take up the project or no.
Once the preliminary study is done by the VC and they find the project as per their preferences, there is a one-to-one meeting that is called for discussing the project in detail. After the meeting the VC finally decides whether or not to move forward to the due diligence stage of the process.
The due diligence phase varies depending upon the nature of the business proposal. This process involves solving of queries related to customer references, product and business strategy evaluations, management interviews, and other such exchanges of information during this time period.
If the due diligence phase is satisfactory, the VC offers a term sheet, which is a non-binding document explaining the basic terms and conditions of the investment agreement. The term sheet is generally negotiable and must be agreed upon by all parties, after which on completion of legal documents and legal due diligence, funds are made available.
The three principal types of venture capital are :
The venture capital funding procedure gets complete in six stages of financing corresponding to the periods of a company’s development
Low level financing for proving and fructifying a new idea
New firms needing funds for expenses related with marketing and product development
Manufacturing and early sales funding
Operational capital given for early stage companies which are selling products, but not returning a profit
Also known as Mezzanine financing, this is the money for expanding a newly beneficial company
Also called bridge financing, 4th round is proposed for financing the "going public" process
Early stage financing has three sub divisions seed financing, start up financing and first stage financing.
Expansion financing may be categorized into second-stage financing, bridge financing and third stage financing or mezzanine financing. Second-stage financing is provided to companies for the purpose of beginning their expansion. It is also known as mezzanine financing. It is provided for the purpose of assisting a particular company to expand in a major way. Bridge financing may be provided as a short term interest only finance option as well as a form of monetary assistance to companies that employ the Initial Public Offers as a major business strategy.
Acquisition or buyout financing is categorized into acquisition finance and management or leveraged buyout financing. Acquisition financing assists a company to acquire certain parts or an entire company. Management or leveraged buyout financing helps a particular management group to obtain a particular product of another company.
There are various exit options for Venture Capital to cash out their investment: