What Is Venture Capital Financing?

Start-up companies that may have yet to generate cash flow are often in need of some type of financial backing to grow. Venture capital financing is one channel that helps new businesses to accomplish this type of expansion. Financing might be provided in the form of equity to privately held companies with solid prospects for growth and profitability. Venture capitalists could provide the financing in rounds and in return seek to share in profits at some point in the future.

New businesses seeking start-up capital from a venture capital firm typically have to request it. Often, the decision to provide venture capital financing to an entrepreneur must be something that all of the senior members of the investing organization must agree on. Even if a business owner has developed a relationship with one member of a venture capital firm, there needs to be additional support from the financing firm in order for the financing to work. Upon agreeing to invest in a start-up business, venture capitalists gain a vested interest in the success of that company. Subsequently, in addition to financial capital, venture capital involvement might extend to other types of support, including management, operational, or marketing expertise.

The debut round of venture capital financing involves seed capital. Seed financing is designed to propel an entrepreneur and a new business to the development stage of a product or service. Any financing provided at this stage may be a relatively small amount because the company remains in the early stages of growth, and the risks associated with investing are often high. Subsequent rounds of financing are likely to be greater as the stakes become higher and venture capitalists seek a greater presence in the management of a company and future profits.

Venture capital firms are often dedicated to a certain niche or industry. It is helpful for entrepreneurs seeking venture capital financing to learn about the types of projects that firm tends to support before making contact. Marketing materials surrounding a venture capital firm are likely to be provided on the company's website or in some type of venture capital database. Upon extending venture capital financing, the firm will likely obtain a position on the start-up business's board of directors to influence the direction of the company. An exit strategy for a venture capital firm, or a way to cash in on profits, may be to introduce the company to the public stock market in an initial public offering.