If you are at all familiar with the world of investing, you have probably heard of venture capital. The risky, high-stakes method has become increasingly popular among investors who are looking for a high payout.
When companies such as Facebook and Airbnb were in early stages, venture capitalists bet on their success and made millions—if not billions—off of that risk. But startups today can benefit greatly from venture capital funding, too.
Overview
The National Venture Capital Association offers a great basic definition: “Venture capital funds make equity investments in a company whose stock is essentially illiquid and worthless until a company matures down the road. Follow on investment provides additional funding as the company grows.”
Let’s break that down a bit.
A venture capitalist is a private equity investor that provides capital to small, emerging companies, often in the pre-commercialization stage. In exchange for funding, venture capitalists take an equity stake in the company. In essence, venture capitalists take partial ownership of the company as payment for their investment.
Though venture capital is technically a form of private equity, there are some major differences. Private equity investors take a majority stake in the company and will typically look for well-established companies that they can turn around to make a quick profit.
Venture capitalists do not often take a majority stake, and they are much more willing to stick around for years—or even decades—to see a profit come from their investment. The below graphic by the NVCA gives a great visual of how startups progress through the stages of venture capital funding.
What types of startups get venture funding?
Venture capitalists are risk-takers, but they still want to invest in companies that have a semi-established business model. If a startup is ready to bring their product or service to the market but is unable to due to lack of funding, venture capital is a very viable option.
In addition, startups in need of outside expertise and connections can benefit from venture capital. As the Hartford Business Owner’s Playbook explains, venture capitalists are typically well-connected in business communities, and they can provide “active support in critical areas including legal, tax and personnel matters.”
It is worth noting that there are many different types of venture capital funding, each of which fits a specific type of company. There are almost certainly more, but five main types of venture capital are often noted:
- Seed Capital: It is rare, but not unheard of, for venture capitalists to invest in a simple idea with no product of organized company. If you do get venture funding at this stage, it is unlikely to be much.
- Startup Capital: Though also rare, venture capitalists sometimes invest in companies while they are in the early pre-commercialization stages. Funding at this stage can help with market research and getting the product or service ready to enter the market.
- Early-Stage Capital: Along with expansion, early-stage capital is the most common stage for venture capitalists to invest in. If your company is off the ground and sales are starting to pick up, venture funding can help take it to the next level.
- Expansion or Late-Stage Capital: Venture capital is often associated with earlier-stage companies, but some VCs also specialize in later-stage investing. If you are at that next level already—your business is established, you have a solid customer base, and you make substantial revenue—expansion capital can help enter new markets or amp up marketing overall.
- Bridge Financing: There are a few venture capital firms that specialize in mergers, acquisitions, and initial public offerings. Venture capitalists can help secure short-term funding to assist with the process of going public.
Are there local venture capitalists?
There are many options for startups looking to find local venture capitalist funding, including Dundee Venture Capital which is owned by Hayneedle founder Mark Hasebrook. For UNO students, the Maverick Venture Fund provides money for early-stage startups. Proven Ventures, part of the Burlington Capital Fund, focuses on funding Nebraska startups founded by women and people of color.
