Venture capital / VC

Venture capital is a popular form of financing for high-risk startups promising great growth opportunities. Investors provide financing to these businesses in exchange for equity in the hope that the company will grow in the long term and that their investment will yield a significant return.

The "interest rate" of venture capital investors is the return expectation. The investor expects to receive a much better price for his share of ownership in years to come than today. The current investor return expectation naturally depends on bank interest rates, but it is always significantly higher than that. The investor risks more. While the bank asks for collateral as security for the loan, which is often part of the entrepreneur's personal assets, venture capital is satisfied with the company's share of ownership, which often does not have any significant salable assets. 

Typically, the repayment of the loan must start in the month following the disbursement, but in the best case the grace period is one year, which means that the company must quickly become profitable. On the other hand, by fulfilling the expected return of the venture capital, the investor counts on a much later date, usually giving the company 3-7 years. Thus, even a start-up undertaking business, such as a startup, has enough time to earn a sufficient amount of profit for a new investor to buy out the previous venture investor or even the founders with the expected return.

In the case of raising capital, the big advantage of venture capital investment over a bank loan is that the investor typically brings expertise to the business. Don't get me wrong, investors (be they business angels, incubators, accelerators or venture capital companies) do not contract to sit in a company and take care of its ups and downs. 

They would much rather invest their money in companies that have enthusiastic, competent and very goal-oriented management. Of course, they want to keep an eye on the company and have a say in determining the basic directions, but day-to-day management is not their job. Of course, the opposite is also true: the companies receiving investment also do not like it when control is taken out of their hands. 

The venture capital investment process begins with the company seeking investment presenting a business plan to the investor. If you show interest, the company due diligence will begin (due diligence) process. In the process, the company's business model, operating processes and financial environment, as well as the characteristics of the products, are thoroughly explored and analyzed. 

Business angels and venture capital companies also know exactly that a good idea is a necessary but not sufficient condition for subsequent success. That is why the due diligence also covers the most important element for the venture capital investors, the team that deals with the implementation of the idea. 

After the due diligence, the investor makes an offer on the amount of capital investment, as well as what share of ownership he would acquire in return and under what conditions. The financing can also come in a lump sum, but it is typical that the extra resource reach the company in smaller rounds or waves, depending on how the fulfillment of the conditions progresses.

It is generally true that it does not hurt if the company's growth can be scalable well, i.e. it is possible to capture and describe the phases of growth, the conditions for moving from one phase to another, and the financial and organizational needs of big leaps. The "today I'll conquer the capital, tomorrow the countryside, then I'm off to the wider world" model seems a bit clichéd for this. In the case of many businesses, geographic extent is important, but economies of scale and the ability to attack the market are usually much more important than this. 

This is also why the role of venture capital does not last forever, the investor's goal is to achieve the set return during a specific period. Compared to the first investment, the investor typically exits the company within 4-6 years. This can be done by acquiring the company or organizes public issue (IPO) and stock market introduction.