How Does Venture Capital Work

At some point your startup will need to scale and you will need funding for your business. In researching possible sources, you may have come across venture capital. But what is venture capital? How does a venture capital fund work? The Investeur team will try to enlighten you in this blog post.

Venture capital firms invest in startups and other businesses that are generally eschewed by banks and other financial institutions. Startups have a high investment risk and little to offer in terms of credentials and fixed assets. The venture capital firm itself plays little or no role in injecting capital into a business; rather, it begins by finding various investors for the fund it sets up, ranging from corporations to large institutions like pension funds. It then invests the money raised in high-risk, high-return startups that are deemed to have good growth potential. In exchange, the firm gets equity or partial ownership of the startups.

Most venture capital firms are highly specific in the type of business they invest in, with every firm having a unique investment profile. Many only focus on a single industry or small group of industries, and may only invest in startups in a specific stage of funding. Some venture capitalists will provide millions of dollars in funding to a single business, while others may prefer to offer $50,000 to a large number of startups. Regardless of what businesses venture capital firms invest in, they will usually invest the entire fund with a common goal: grow the businesses using the money invested, until a “liquidation event” presents itself. In venture capital speak this means the business is sold either to other investors, another company or listed on the stock exchange. The venture capital firm can then sell the shares it owns to yield returns for its investors—as well as profits for the firm itself. Liquidation to regular people usually means bankruptcy which can happen too of course, but that will never be a venture capital firms goal.

With such specific criteria to work with, it can be difficult to find the venture capitalist that is not only willing to invest in your startup but also matches your startup’s needs. Fortunately, Investeur’s funding analyses platform in partnership with Golden Egg Check can help you find investors and match you to a suitable venture capital firm.

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