Venture capital is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake, in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes that some of the firms they support will become successful. The start-ups are usually based on an innovative technology or business model and they are usually from the high technology industries, such as information technology (IT), clean technology or biotechnology..
A venture capitalist is a person who makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments.
Venture capital is also a way in which the private and public sectors can construct an institution that systematically creates business networks for the new firms and industries, so that they can progress and develop. This institution helps identify promising new firms and provide them with finance, technical expertise, mentoring, marketing "know-how", and business models.
There are typically six stages of venture round financing offered in Venture Capital:
Seed funding: The earliest round of financing needed to prove a new idea, often provided by angel investors.
Start-up: Early stage firms that need funding for expenses associated with marketing and product development
Growth (Series A round): Early sales and manufacturing funds. This is typically where VCs come in. Series A can be thought of as the first institutional round. Subsequent investment rounds are called Series B, Series C and so on. This is where most companies will have the most growth.
Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit. This can also be called Series B round and so on.
Expansion: Also called Mezzanine financing, this is expansion money for a newly profitable company
Exit of venture capitalist: VCs can exit through secondary sale or an IPO or an acquisition. Early stage VCs may exit in later rounds when new investors (VCs or Private Equity investors) buy the shares of existing investors. Sometimes a company very close to an IPO may allow some VCs to exit and instead new investors may come in hoping to profit from the IPO.
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