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What is Small Business Venture Capital?

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  • Written By: Patrick Roland
  • Edited By: R. Halprin
  • Last Modified Date: 01 February 2020
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Small business venture capital refers to the money given to a small start-up company by a group of financial backers in order to bring an idea or service to market. These funds are needed by start-up entrepreneurs without the financial means to reach the public alone. The investors provide this funding with the hopes of seeing a return on the investment and to receive some ownership stake in the proposed venture. Investors and small business entrepreneurs may have certain expectations once the money changes hands.

Any amount of money provided to an inventor, entrepreneur, or start-up is considered small business venture capital. In most cases, an entrepreneur has an idea or prototype with the potential to earn money because of a market demand, but lacks the personal funds to start or grow the business. Acquiring venture capital funding can be the best way for a small business to bring an idea or product to the public.

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The actual money comes from a variety of sources. Investors may provide small business venture capital because they have a surplus of cash and want to earn more money by loaning it to a start-up with the potential for success. In return for the financial backing, it is expected that this money will be returned to the investor in a specified amount of time, and often with interest. When profits aren't immediately available to return to investors, the difference is frequently made up in the form of stock options.

Small business venture capital seldom comes from private individuals, although that is not unheard of. A more likely scenario is that the product or service's inventors solicit the money from a small business venture capital firm that specializes in funding start-up projects. These firms focus on small businesses because the initial monetary investment is relatively less and the potential for earnings is good. Venture capital brokers are another way to usher in funds for a small business because this independent party acts as a middleman to funnel investment dollars to needy start-ups.

Once the money exchanges hands, each party has expectations about what, specifically, the venture capital entitles them to. In most cases, providing money to a start-up entitles investors to have access to financial records and decision making. This money, when in possession of the entrepreneurs, can be used in any way necessary for the eventual success of the project unless otherwise specified.

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