Venture capital – investment in new business ideas
In the tech scene, venture capital has already existed for decades in the financing of start-ups. If you want to realize a business idea, you can close the financing gaps that arise with the help of an investor. In contrast to traditional bank financing, however, the venture capital is not a loan. Rather, as the German names of risk and venture capital already suggest, investors are taking the risk or risk that the potential market opportunities promised by a product may or may not materialize. In the positive case, they can maximize the financial resources used. However, there is always the risk that the start-ups will not be successful and that the capital invested will be lost if the company has to go bankrupt. In addition to providing financial resources, venture capital donors also support startups in management strategies. Many investors look back on a startup past and can often support the founders with knowledge and ideological questions. In addition, they help companies build a network of contacts.
Financing phases in venture capital
The purpose of the venture capital financing and the amount of capital invested depends to a large extent on the development stage of the start-up. Seed stage capital, early stage capital and later stage capital are to be distinguished here. Seed stage capital is usually a start-up capital, which is provided for start-ups for research and development purposes. The aim of this venture capital investment is to make the respective service or product market ready. The risk associated with this is particularly high for the investor, since the product or the service is not yet fully developed and the success opportunities in this early phase are difficult to estimate. As a result, venture capital investors at this stage demand a much higher participation rate than at later financing phases. This means investors are buying into the company at a significantly lower price, but also bear a higher risk. Early-stage capital, on the other hand, is used to provide financial resources for the test phase and the successful market introduction of a nearly mature product. Compared to seed funding, the investor is less risky, since the product can already be presented with regard to its functionality. However, even in this financing phase it is not yet clear whether the business idea will be commercial success. The third form of the risk capital investment, the later stage capital, is always used, When startups go into the growth phase. The respective product has already reached market maturity and the company was able to realize its first sales with product sales. Further financial resources will be needed to expand the production and distribution capacities. Since the investor can already see whether the product is commercially successful, the risk is particularly low in this venture capital phase, and start-up purchases are at a comparatively high price.
Exit: Exit of venture capital donors from start-ups
The final stage of venture capital financing is ideally the so-called exit, ie the withdrawal of investors from the company. Depending on which strategy is pursued with the risk capital, the exit takes place after two to seven years. With the withdrawal from the start-ups, the desired return is to be implemented. Investors can withdraw by selling the shares to the original founders, for example. Alternatively, the exit can also be carried out as part of an IPO.
Advantages and disadvantages of venture capital
The financing of start-ups via venture capital brings a number of advantages. In this way, not only comparatively large financing gaps can be concluded. In addition, the founders are given a long-term financing and therefore also planning security. The investors also support the start-ups in organizational and strategic questions and help to develop a contact network. On the other hand, venture capital financing has some disadvantages. Companies that opt for this form of funding must often give the investors the right to participate and control. Moreover, the formal requirements for the provision of capital are often very high and the start-ups are under enormous growth pressure.