| What is venture capital and how does it differ from | | | | up and the cost of repayment is very high. The |
| other forms of equity procurement? The answer lies | | | | advantage of venture capital is that it is often the |
| in an understanding of the relationship of risk and | | | | only way to launch the business. It is pretty much a |
| return in investing. | | | | safe assumption that if the people starting the high |
| One of the key principles of investment is that the | | | | risk business were able to secure financing through |
| greater the risk, the greater the potential for high | | | | normal channels at lower cost and without |
| rate of return. This might be called the "no guts, no | | | | surrendering any ownership control, they would do |
| glory" theory. If you are looking for a very safe and | | | | so. |
| secure investment, there are plenty to be found, but | | | | This explains why venture capital is used so often in |
| you can be reasonably sure that your rate of return | | | | companies introducing new technology. Software |
| will be low. These low return, but safe investments | | | | companies and the now infamous "dot com" |
| are designed for long term investment. Even a small | | | | companies were good examples of firms that sought |
| rate of return will have some accumulated value far | | | | venture capital. Their main assets were ideas rather |
| into the future. If you are looking to really make | | | | than tangible and solid items that were more likely to |
| money on your investment, you must be willing to | | | | act as collateral in the eyes of a banker. Yet, it is in |
| take risks. What is venture capital? It is capital that is | | | | emerging technology that the opportunities for |
| invested in high risk, but potentially high return | | | | tremendous profit lie and this is what attracts the |
| ventures. | | | | private investor to venture capital. |
| Venture capital is considered a private equity source. | | | | In some cases, groups of individuals join together to |
| This means that it is not made available by normal | | | | create venture capital funds. The idea remains the |
| lending institutions such as banks. Rather it is equity, | | | | same. The venture capital fund acts only as an entity |
| most often in the form of cash, that is made | | | | to handle the investments of the group. Some |
| available to finance the start up of companies that | | | | venture capital funds make investments on behalf of |
| have an innovative idea, but lack the capital and do | | | | third party investors, but the definition of venture |
| not qualify for debt type of financing. In most cases, | | | | capital remains unchanged. Venture capital is not |
| the venture capital is exchanged for an ownership | | | | restricted to start up either. In some cases, it is used |
| interest in the new company. This is most commonly | | | | for research projects or expansion of an existing |
| in the form of stock ownership. | | | | company. Once again, these alternative uses do not |
| The disadvantages of using venture capital as | | | | alter the basic definition of venture capital. It is a |
| opposed to normal debt financing for start up costs | | | | private source of funding for high risk companies |
| include the fact that some ownership rights are given | | | | offering potentially large returns if successful. |