Creating a business requires creating an investment plan for it to last successfully over time, and among the different ways to invest in a business, today we want to talk about financing with venture capital funds. Have you heard about it? Here we tell you what it is for and what are its main advantages and disadvantages.

What is Venture Capital Fund financing?

To speak of financing with venture capital funds is to resort to new resources that contribute to the growth and expansion of a company.

Although at the beginning these funds were reserved for consolidated companies, today it is very common for startups and innovative projects to join them.

Therefore, we consider venture capital financing as a type of financing that is characterized by informed risk-taking in support of great ideas and smart people, enabling start-ups to take their ideas to market and grow.

In addition, specialized corporations manage the capital, investing their own resources to strengthen the SMEs and obtain new profits by selling their participation over the years.

Types of venture capital funds

Taking into account the time of life of the company and the type of project to be managed, we can mention two types of venture capital funds:

Seed capital (venture capital)

These are aimed at companies that are in their initial phase and have a high growth potential, either in the technological field or through some other component that highlights innovation.

Growth or development capital (private equity)

These are aimed at companies already consolidated in the market, but with growth potential and significant sales volume.

In this case, we are talking about projects that have demonstrated great viability for at least 1 or 2 years and want more capital to promote their expansion and consolidation.

Characteristics of venture capital funds

In order for you to understand a little more about venture capital funds, in the following outline we leave you with five characteristics that you should take into account:

How does venture capital work?

Now, the process of operation of venture capital funds in a company is quite simple. Investors have a minority stake in the company’s capital and their investment is intended to be temporary; therefore, they do not intend to remain partners or shareholders in the long term.

Similarly, venture capital investors essentially intervene in the launch and development phase of the business, and then proceed to sell their stake in the company.

And you may wonder how companies can attract this type of investor? Basically, they need to have considerable growth potential, as well as a well thought-out business plan.

Unlike banks, which seek collateral; venture capitalists share the risks of start-up, development and profits of the company if it is successful.

Finally, it is important to note that in order for an investor to make the decision to invest in a company, he/she must study a business plan prepared for a minimum of three years.

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What are the advantages of venture capital?

• It involves a minority capital investment, which allows the entrepreneur to retain a great deal of freedom in managing the company.

• Facilitates a company’s internationalization process

• Contributes to the initial development and growth of an enterprise

• Allows entrepreneurs to finance a project and considerably increase their chances of obtaining bank financing

• Increases the prestige and credibility of the business

• They provide access to considerable sums of money

• Introduces a higher degree of professionalization in decision making

• Facilitates capital mobilization and succession in companies

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What are the disadvantages of venture capital?

• The addition of new people to the company means that there are more voters at general meetings, which may result in a partial or even total loss of control of the company.

• It involves considerable expenditure on studies and structuring of operations.

• In some cases, it may restrict future investment possibilities.

• If the private equity investors have at least as much decision-making power as the manager, it is possible that they could sell the company at any time.

• If the business does not grow as much as expected, investors can sell it to ensure a minimum return on their investment.

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Having the presence of a venture capital fund financing in your company means offering an innovative project with growth potential, as well as allowing the entry of external agents involved in decision making in your business. Are you thinking of looking for an investor for your company? Consult our experts at TAS Consulting, they will advise you on every step you need!