What is venture capital? This refers to is where a firm funds investment or is available for investment in a company that has high likelihood of profitability as compared to the losses. Traditionally, this type of investment was known as risk capital. However, its usage has diminished because investors hate the words risk and capital in close proximity. Venture capitalists usually have a low of risk imagination and are always optimistic of receiving profits. Their success is however pegged on the investors’ business expertise. On a general scale, enterprises have venture capital investments of $500,000 and $5 million and the expectation of an investor is to get annual profit of 20-50%.
The rise of dot-com startups recently was largely attributed to venture capital investments. For instance, the internet was a new business platform with a range of opportunities, leading to the suspension of some basic business rules that had been upheld previously. Thus, during the same period, online-based business was poised to experience success as most venture capitalists encouraged dotcoms to focus on higher levels of performance as opposed to deriving contentment from early profits in business. For example, the U.S. venture capital funding for the year 2000 was $105 billion. This was more than the total funding that had been witnessed fifteen years before. However, severe market corrections, which were necessitated by changes in the financial market, saw the fall of online business at alarming rates. Venture capitalist was coined in 1980s and in its recent usage; it refers to investors buying dotcom businesses, which are collapsing at low prices.
In essence, venture capital can be views as the second or third level of the conventional financing cycle, which begins with small operations, which are funded by individual entrepreneurs. At this level of progression, an angel investor may be interesting in funding the business. Angel investors are usually filthy rich tycoons with spare money and industry-related interest. Some financial experts argue that angel investors usually use “emotional money” to fund businesses. On the other hand, venture capitalist “logic money” which has the potential of boosting the enterprise and give it a better foundation.
Oftentimes, first-round venture capital funding consists of considerable money and managerial support. The second round involves chunks of money accompanied with instructions to an IPO guarantor, who will sell the shares in exchange of an agreed percentage of what is sold. In the final stage of IPO, an enterprise commissions an investment bank to trade the stocks to the public. Nonetheless, a return to the conventional business ideologies, companies are have a task of showing profitability to the world in order attract investors. Without this, it will be impossible for an enterprise to win investors with ease.
Venture capital is considered a better way of sourcing funds when you are starting a business as compared to common methods like bank loans, personal savings and bootstrapping. These methods have a host of disadvantages and favor wealthy individuals. The argument is, venture capital allows you to get large quantities of money, which can be a significant boos to the business.
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