There is usually a lock-up period after the initial offering that insiders (including venture capitalists) are not allowed to sell their shares. If the company is operating well and moving to the public exchange, the venture capitalists can take the IPO strategy by selling their portions of shares in the open marketplace after the IPO. In addition to the new investors, the shares can also be acquired back by the investee companies, which is called a “buyback.” 3. The new investors can be other venture capitalists, private equity investors, or acquirers. Since the shares have not been issued in the public exchanges, the trades take place in the private equity secondary market. Secondary marketīefore the company goes public, the venture capitalists who invested in the earlier stage can sell their holdings to new investors during the later rounds. A proper decision on how and when to exit also significantly impacts the return of the investment. The process that allows venture capitalists to realize their returns is called an “exit.” Venture capitalists can exit at different stages and with different exit strategies. The venture capitalists can thus earn returns by selling their shares to other investors. If the company can survive through all the stages successfully, it can reach to the public equity market through an initial public offering (IPO). Venture capitalists also invest at this stage, and the risk is even lower than in the early stage. The later stage is when the company is seeking for growth and expansion. However, the risk of failure is still considerable. At this stage, venture capitalists face much smaller risks than the investors at the previous stage, since the company has started to generate revenues and cash flows from its sales. When the company moves to production and selling (the early stage), it is the time that venture capitalists start to come in. The funding is mainly used for research and development and team build-up at the seed capital stage. When seed capital is limited, the startup seeks investment from angel investors. It starts with the seed capital invested by the founders themselves, family, and friends. The financing cycle of a start-up consists of five stages. In general, a venture capitalist invests in the companies at their early stages, as a private equity investor invests in mature firms with relatively stable cash flows. The major difference between venture capital and private equity investors is the stage that the investee company is in.
Regarding such features, venture capitalists are higher in net worth and adopt a longer investment horizon and closer relationships with the investee companies, compared with general public market investors. They also participate in the management of the companies that they invest in by owning a significant ownership stake.ĭifferent from general investors, venture capitalists not only provide capital financing but also offer expert management and technical support to the start-ups to boost their chances of success. One of the most important skills of venture capitalists is the ability to identify the growth potential of innovation.
They can be wealthy investors, investment banks, and other financial institutions.Ī start-up that attracts venture capitalists generally develops or owns an innovative technology or business model. Venture capitalists, who are willing to bear higher risks for higher returns, invest in the companies in exchange for an equity stake. The beneficiary companies are usually considered to be with high growth potential, but the high failure risks that accompany the potential return makes it difficult or costly for them to borrow from banks. Venture capitalists are investors who provide financing to start-ups or small companies that are looking to expand.
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