The term venture capital or VC comes from the USA and describes the provision of equity-like capital or liable equity. As far as the provision of venture capital is concerned, this is limited in time to a term of between three and ten years and is also contractually stipulated. For this, however, the provision of collateral on the part of the borrower is largely dispensed with. First and foremost, the provision of a VC is made dependent on the company’s growth opportunities and the resulting returns. Defined by abbreviationfinder, the VC is used for financing early business phases, growth phases and special financing occasions.
In addition to the financial component, the venture capital also includes support and advice. The scope of this offer depends on the actual offer from the investor and on the level of development or the requirement profile of those who make use of the VC.
Who is using the venture capital?
As a rule, the capital takers are young, innovative companies that come from the technology sector and are not listed on the stock exchange. These small and medium-sized companies have a high potential for growth, but at the same time also have a high risk of default.
The term venture capital has several German terms that are used as synonyms, but none of them describes the exact content. The term “venture capital” is used most often and has a negative connotation and emphasizes the risk of investment. Other terms are “venture capital” and “investment capital”, but these are too general. Even the German term “risk capital” is often used. It is true that venture capital is some type or form of venture capital, but that is not the only possible form.
How venture capital works
The venture capital is made available as equity-like funds or as equity and the company that draws on the capital is usually referred to as a portfolio company.
In addition to the VC, the investor also provides support and advice and this can consist of the support and transfer of management know-how, the provision of industry information or the transfer of contacts and cooperation partners. Furthermore, the support can also take place in other forms such as:
- The support in day-to-day business
- Support in strategic alignment
- Advice on setting up the organization
- Relationship mediation
- And the function as “vitamin B”. This means that access to the network is provided, and it is helped to establish important contacts such as important customers or investors.
How the scope of support ultimately turns out depends on the investor or the investment company and is geared to the needs of the company. A young company usually needs more support because they still have deficits in many areas.
When do the investors or venture capital companies invest?
The venture capital companies differ not only in their different industry focus, but also in their different investment phases. Basically, the VC companies invest in one of these three phases:
- The pre-start-up phase (seed)
- The start-up financing (start-up)
- The first growth phase (expansion)
What does the investor receive in return?
In return for the venture capital, the investor receives a stake in the company. This stake is usually 20 to 35% and that makes the investor a minority shareholder. Furthermore, the investor actively participates in the company and often demands control and a say in what is known as venture management. The borrower is not contractually obliged to repay the VC or to pay interest on the amount and he cannot be held liable for the capital invested.
This means that the investment risk lies with the investor, who can also benefit from the company’s high growth opportunities. Investors have the opportunity to participate directly or indirectly in the company and the investor is not always to be equated with the provider of the capital.
In the case of a direct investment, the investor invests himself, and in the case of an indirect investment, this is done by an investor from a so-called venture capital company that invests the capital in various companies. The venture capital financing is typically carried out by the VC companies.
How high can venture capital be?
As far as the amount of venture capital is concerned, it depends on the needs of the company and also on the offer of the investor or the venture capital company. The volume starts at 10,000 euros and there are no upper limits. In particular, private VC providers such as friends and family, for example, are sometimes only able to offer smaller amounts.
How high the return is, that cannot be determined from the current figures, and income that results from dividends or interest payments is also the exception in venture capital financing. Only at the end of the investment phase is the investor’s return realized through the exit (the sale of the investment). For this very reason, the investor always has a great interest in the growth and appreciation of the portfolio company.