The definition of Venture Capital is a type of financial operation in which an entity contributes capital to startups with high growth potential and high levels of riesgo. In exchange for this, it will control a percentage of the business, which will be between 20 and 30%, in addition to having a position on the board of directors and / or having the right to vote in the assemblies.
The Venture Capital concept is presented as a financing method for those companies that are in the development phase and that have already resorted without success to other sources of financing. These are companies that are not listed on the stock market.
Those that usually resort to this type of capital are usually small companies, with a high risk, negative results in the first years of life and that are willing to provide a part of the business to those who offer themselves as venture capital with the purpose to grow the company.
Regarding the duration period, investors must immobilize the capital for a period of five to ten years before exiting the capital of the company. It is very important not to confuse this concept with the Private Equity, another variant of venture capital.
Phases of a venture capital
Below we detail the different stages of a venture capital:
- Fund raising: this period lasts between six months and a year. The venture capital company seeks funds from investors.
- Looking for investments: when venture capital closes to new investors it is time to start looking for investment opportunities. This phase lasts up to five years.
- Deciding the investment: it is about specifying the companies in which to invest and the amount of the fund that will be dedicated to each one. This stage will coincide with the time established in the previous phase.
- Manage investments: Once the capital is already invested, the venture capital entity must begin to manage the portfolio of companies and provide it with experience. Profits start to emerge and the exit strategy begins as well.
- Liquidation: the fund is closed and the profits obtained are shared between the venture capital entity and the investors.
Discover all the information you need about the venture capital and the importance they have to carry out entrepreneurial projects.