What is venture capital?

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What is venture capital?

In the simplest terms, venture capital is a term used to describe investment in startups.


Like most words, venture capital comes from the Latin "vir" which means "man" and "corpora" which means "bundle."


VCs invest in early-stage technology companies, and since all of them are in the process of development, the word "investment" is not far from the truth.


Startups and VCs need each other


While venture capital is not a new concept, the internet has played a significant role in opening the world's eyes to the scope of venture capital, helping to develop an ecosystem of funding for these young tech companies.


The reason for this is that Silicon Valley, for the first time, has a large enough pool of money in the form of venture capitalists to really make an impact.


Funding is an important tool for the growth of a business, and since the resources are limited, a startup needs the right tools to continue growing in the market. This is where venture capitalists come in.


As of 2016, there were approximately 3,700 venture capital firms and they collectively manage over $1.3 trillion worth of capital, including more than half a trillion dollars dedicated towards the US.


The successful founders of the billion-dollar startups have raised a large sum of money from VCs. What's more, the entrepreneurs have been instrumental in bringing new startups to the market.


They have also managed to create a buzz for this sector and have led the way by investing in young companies that could change the world.


Some of these VCs, such as Greylock Partners, have held the interests of great entrepreneurs like Facebook's Mark Zuckerberg and Twitter's Jack Dorsey.


Venture Capital is not limited to the US


The vibrant ecosystem in the US alone has made venture capital an exciting investment option for entrepreneurs and investors, with VCs taking part in a number of markets across the world, including Africa.


In order to attract more VCs, companies should align their business goals with the interests of VCs and use innovation and technology to engage with and deliver value to VCs.


Partnering with a VC firm not only enhances a business' growth, but can help the business make an impact in the world and gives the VC firm the tools to keep up with the competition and stay ahead of the curve.


However, it should also be noted that not all VCs are created equal. Many have specialised in certain industries, and while this means they are more likely to have a strong understanding of a specific market, it can also mean that they have a more defined strategy that their startups are unlikely to be able to match.


This, of course, does not mean startups should not consider these investors. Just make sure you find the right fit for your startup.


Startup financing: Which types of financing are available?


Funding through venture capital does not stop with just one type of investment. There are many other options available to startups to help them in their growth journey.


Venture capitalists are likely to provide funding in two main forms: debt and equity.


Debt financing is commonly provided by banks and many startups opt for it. It involves borrowing money from banks in exchange for a specified amount of equity in the startup. This type of financing has benefits over equity funding because it allows the startup to diversify its funding options.


Equity financing, on the other hand, is usually provided by angel investors, or wealthy individuals who are not actively involved in the management of the business but want to invest in it anyway. They invest money for a long term in exchange for shares in the business.


Some entrepreneurs have other financing options, such as crowd-funding, which is generally a one-time investment by an individual to help raise funds for a specific business venture.


Taxes and legislation around fundraising


If you are seeking funding for your startup, don't be surprised if you encounter a number of obstacles. Startups are often discriminated against by banks and VCs because they take away money from potential profit-making ventures.


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