A Beginner’s Guide to Successful Venture Capital
Saturday, May 24, 2014, 1:00 AM | Leave Comment
Venture capital (VC) is a unique investment that can be highly lucrative, but also comes with risks that are much different from other options such as bonds and ETFs. For those that have become interested in this form of investment, here is a closer look at exactly what to expect.
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Controlling Risk
When compared to other forms of investment, venture capital investments have advantages and disadvantages. Unlike third-party companies or government accounts that often provide full or partial guarantees, venture capital may or may not be returned. In the end, skilled ventured capitalists are looking to minimize and control risks whenever possible in hopes that one or more of their funds support a highly successful company.
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Returning Investments
There are a number of ways in which investments can be returned. If the company goes completely bankrupt or sees no gains, then it may be a completely dead investment with zero return. The final goal is to have the company become highly successful on its own, be purchased by another company, or to eventually go public. The typical timeline for any one of these three outcomes scales from 5 to 7 years.
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Early Stage Investments
Seed money and “angel investing” are two forms of early stage venture capital that are used to start off a company or bring an idea to life. The overall investment from a venture capital fund is relatively small, often as little as a few thousand dollars, and can be used to research the idea, begin making small purchases, or even used as the initial capital for a storefront, hardware, supplies, and other basic necessities.
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Expansion Capital
At this stage, the company is now fully in production and investors are going to be taking a look at a few unique points. They want to not only see the success of the company, but they will also closely scrutinize the owner or owners. Investors will want to see a solid business plan with an outlook for very reliable profits.
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Acquisition and Growth
This is the final stage of investing and one that requires much more money but often has a little more security. At this point, companies typically have gone public and are looking for millions of dollars to make aggressive moves in the market. While the venture capital funds will be much larger, investors have less risk as they can sell off their share of the company if things look bleak.
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Complex Legal Webs
When it comes to venture capital, secure, clear terms are essential to both the investor and the the client. Cases like this can become very sensitive and have a high potential for getting ugly. According to Carter West, a law firm from the Silicon Valley, many of the laws surrounding secure venture capital are extremely complex and require a lawyer to navigate through.
These few steps are only the beginning in this complex but lucrative form of investment. The crucial aspect of venture capital investing always comes down to both the product and services of the company as well as the owners themselves.
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