In order to start a profitable venture, the venture capitalist is an essential part of the start-up ecosystem. When any start-up has a robust business plan, marketing strategies, and offers products or services which cater to a larger portion of people to solve their problem, the most important requirement is an ample amount of money to start a profitable venture. In this column, we will discuss what is Venture capital Financing, venture capital advantages, and disadvantages, methods of venture capital financing, stages of venture capital financing, funding process of venture capital financing, features of venture capital, venture capital financing in India, venture capital example.
What is Venture capital financing?
A new venture or start-up requires funding. There are various sources of funding namely,
A business loan from banks or NBFCs,
Funding from friends or relatives,
But for that start-up which has huge capital requirements with a robust business plan and the potential to grow into a highly profitable venture makes use of venture capital financing. The company makes use of venture capital financing from angel investors or venture capitalists by selling a percentage of the business or the company to the investors, in exchange for capital. Usually, this type of investment can be treated as high risk, a high-profit investment that involves the inherent risk of losing the invested capital if the business does not succeed.
Advantages of Venture capital Financing
Here are the advantages of venture capital financing.
No collateral required – If you have a business plan along with the business model and profitability then angel investors or venture capitalists invest in your project without any collateral.
No repayment period – Unlike debt financing, you need not pay any fixed monthly or yearly payments to make it happen. This enables a company to manage funds efficiently for expansion of business or purchase of machinery to boost production.
More cash on hand – You have more cash on hand and no loan burden. So, you as the company can declare a dividend to the shareholders in accordance with the profitability of the company.
Long term planning – Since the investors do not expect the immediate return on their investment, you can manage the funds efficiently which will yield better returns in the near future.
Disadvantages of Venture Capital Financing
Here are the disadvantages of venture capital financing.
Complex Process – In order to raise funds you need to approach venture capitalists or angel investors by submitting a robust business model, future revenue projection, whether your venture will succeed in the future, profitability, etc. So, raising a fund from venture capitalists is quite a long and complex process.
Share of Profit of the company – Since equity gives an ownership right and voting right to the shareholders, the dividend paid to the shareholders is more than the interest payable in the case of debt financing.
Loss of control – Since the shareholders are the owners of the company, you need to consent or consult with the shareholders in the case of differences of opinions among the shareholders.
Methods of venture capital financing
In order to raise funds to survive and grow a profitable venture for a longer period, start-up companies make use of various methods namely.
When a company requires money to finance the start-up which has huge capital requirements with a robust business plan and has the potential to grow into a highly profitable venture, the company makes use of equity financing. Companies offer a percentage of the business or the company to the investors, in exchange for capital when the company or firm is not able to give timely returns to its investors. The investors who buy the share of any company have a voting right.