Venture capital is a type of private equity funding that are offered by venture capital firms to early-stage, startup, and growing companies that are deemed to have excellent potential for growth or that have shown consistent growth or development over the past three years. Venture capital firms generally fund these types of companies based on their business models, future prospects, potential sources of revenue, their credit ratings, and other factors. Venture capitalists typically require a personal guarantee from the company's senior management, an investment by a third party in the company, or an ownership stake in the company. Venture capitalists may also use a points system to fund early-stage companies.
A venture capitalist will most likely require a large amount of shares or equity as part of their investment in a company. The typical venture capital firm will require at least 50% of the total issued voting power in a company. In exchange for this equity, the venture capitalists will receive a fixed return on their investment. This typically includes a portion of the company's issued equity as capital gains and a portion of the company's net profits or net loss. Most venture capitalists also require the completion of a successful business plan that highlights the anticipated benefits of the business and includes financial projections that are two to four years in advanced.
Private equity firms will work with venture capitalists to provide seed money, preferred or common stock, and other types of investment as it relates to raising capital for a new business. The venture capitalists will provide startup cash for the period of time needed to conduct operations. Lending institutions, investors, and vc fund companies will also provide seed money to new businesses on occasion. The venture capitalist will ensure that this money is repaid to them on a regular basis. They may also be involved in the initial public offering of a company's stock.