Sometimes known as seed capital, early stage venture capital is money invested in a start-up company during the earliest phase of the company’s operation. This typically includes the launch period in which the company is structured and actually begins to produce goods or services. This type of first round financing is often critical to the new business, since it provides the money needed to allow the business to function as it attracts the attention of consumers and begins to build a client base.
Investors sometimes find that early stage venture capital is a good way to earn a return in a relatively short period of time. The funds invested are often dedicated to specific aspects of the operation, such as the establishment of a manufacturing facility or the creation of a public relations campaign. As the business begins to generate income, investors who directly contributed funds to those functions are repaid with interest, or receive a repayment of the principal and shares of stock issued by the new company.
Since the method of earning returns on early stage venture capital vary, it is important to understand the terms and conditions associated with each venture. This includes identifying how interest payments are to be made, whether the principal will be repaid in installment payments or a lump sum by a specific date, or even if the investor may be offered shares of stock in lieu of repaying the venture capital. Making this type of assessment on the front end is important, since the idea is to match the goals of the investor with the needs of a new business venture, resulting in both parties being satisfied with the arrangement.
There are some risks associated with providing early stage venture capital. The most common has to do with the failure of the business venture to begin generating income within the anticipated time frame. When this takes place, the investor may have to wait a little longer to begin receiving some sort of payments on the initial investment. Depending on the length of time that it takes for the business to become profitable, the investor may find that the funds are tied up for much longer than anticipated.
Another potential risk is that the business will fail to attract consumers and ultimately not generate any profit at all. In this scenario, the investor may or may not recoup the early stage venture capital, and is highly unlikely to receive any type of additional compensation such as interest payments. For this reason, investors should evaluate every aspect of the business model and ascertain the potential for its products to attract enough consumers to support the venture. If there is any reason to believe the venture does not have a good chance of succeeding within a reasonable period of time, the investor should seek other early stage venture capital opportunities that show more promise of a successful launch.