How Should I Start Investing in Venture Capital?
Venture capital is really a form of private equity or a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Although an angel investors club is a better option for inexperienced.
Venture capital generally comes from well-off investors like investment banks and any other large financial institutions. In this article, we are going to discuss the different types of capital and how to start investing in this type of capital.
Understand Venture Capital Investment
The very first thing that you need to understand about venture capital investment is that this is a type of capital finance that you need to be aware of as soon as you are trying to figure out how to start investing in venture capital.
The very fact that this finance exists is a testimony to the fact that the company in question has long-term growth potential.
High Return On Their Investment
You need to understand that this capital is provided by investors who are looking for a high return on their investment, and it also shows the investors that the company in question has promise and the team behind the company is capable of producing a high return on their invested money.
There are two types of venture capital investment available for investors, in-house capital and venture capital funds.
For startups and small industries that are in the very beginning of their life there really is not any other choice than to use the in-house capital provided by the company itself.
Growth Of The Company
The in-house capital provided by the company will have a long-term effect on the growth of the company. In some cases, it will increase the profits the company generates, and in other cases, it will produce in-house the required capital for the company.
Venture Capital Fund Manager
For businesses that have been around for a while and have already produced in-house the next choice that investors have is to find a venture capital fund manager.
A venture fund manager will take the company's profits and look for new business growth. This is where the money will come from as all money that is generated by the company will be shared 50:50 between the in-house and the venture fund manager.
In most cases, the venture capital fund manager produces the company's future profits.
Stock Trading System
The fact that there are now profitable businesses available for investment means that the company is now ready to take the next step and start its own capital market activities with its own stock trading system. There are companies that simply need the funds to begin their own activities in the capital market.
Private Equity Financing
This type of private equity financing is done via venture capitalists. Investors do not have a say in the day-to-day operations of the company, only lending their money to the company and have a minimal ownership stake.
In some instances, this type of venture capital financing is done with a company's debt.
For a company to qualify for venture capital, they generally must have a minimum investment of $250,000 and there must be at least 5 investors. The startup company can come from a single corporation or a group of companies.
For the venture capitalists to back a startup, they generally have to approve the company's capital outlay. Investors who use this funding method can get a small equity stake in the company that they are investing in.
Company's Operations And Performance
This is a better deal for the investor as he gets a more than 10% ownership stake, unlike traditional angel investors. These investors also get regular reports on the company's operations and performance.
A lot of venture capitalists are tech-savvy and are involved with tech startups. They are experts in the latest technology and are familiar with the latest technology advancements.
So, they can advise tech-savvy startup companies about where they should invest money to increase the chances of the startup becoming profitable.
Approving The Capital Expenditure
The company that is going for venture capital investment usually has a board of directors that is approving the capital expenditure. The board is made up of either entrepreneurs or former entrepreneurs. The former is tech-savvy whereas the latter is usually entrepreneurs who have a background in tech startups.
This board typically meets on a monthly or biannual basis. This board usually has the authority to approve the quarterly updates on the company's capital expenditure. The updates include, how much money the company spends on capital, how much money the company spends selling shares, how much money the company spends on net surplus etc.
For tech startups, the board is usually made up of the CEO and CTO whose expertise lies on tech startups. Their expertise is important as they are involved with companies whose business is tech start-ups.
Tech Startup's Expertise
The board also has knowledge of the latest tech startups, which can help companies pick up a skillful tech startup. Thus, it's important for companies to follow the board's advice and seek to pick up tech startup's expertise.
Most Companies Need a Niche
The board is also important in the traditional angel investor's context. The board is usually made up of individuals with expertise in the company's industry. Their knowledge of the company's business can help companies pick up a profitable niche. This is important because most companies need a niche to survive.
Follow A Successful Practice
The second important tool companies need before approaching angel investors is to follow a successful practice that has worked on countless occasions. The practice is simple, companies seek out a mentor company in angel's network.
Then companies seek out the mentor's equity partner or partner's equity company to seek a follow-up equity investment. After a time the company can get a list of equity partners/equity companies to seek follow-up investments from.
Follow-up Equity Investment
The follow-up equity investments can help the company gain valuable knowledge of the market. By seeking to follow-up investments companies can learn how to manage the follow-up equity investment properly, thus, increasing the chances of the follow-up company succeeding as well.