Venture capital (VC) is, today, the most common form through which startups or emerging companies are financed. According to the PWC Money Tree Report prepared by PwC, in 2018, almost 100 billion dollars were invested in this type of transaction in the US, with 21,000 invested in Europe in the same year (14% more than the previous year) .But What exactly is venture capital? What advantages does this funding formula offer for entrepreneurs? As its name suggests, it involves an economic commitment to projects that have great growth potential, but that involve a lot of risk. In fact, investors are aware that out of every 10 startups invested they may only have 1 that explodes, 2 or 3 that don't do well and about 6 or 7 that will not be profitable at all or will even close in a short time. The representatives of the VC know that this is going to happen and will try to make sure that the return on investment of the successful company is worthwhile and serves to compensate for the losses that will be generated by those who hit the road.There are usually two figures who manage venture capital: business angels and venture capital firms. Everyone invests in a stage of startups and it is normal for the former, who usually invest individually, to do so at an earlier stage.
Advantages of venture capital as a means of financing for startups
Why should you use venture capital to finance your startup if you are an entrepreneur? There are several reasons. One of them is that, unlike a grant or bank loan, technically you will not be obliged to return the money you have been lent and you will not have to assume interest of any kind. Obviously, investors are interested not only in recovering what they have put in, but in multiplying the amount, but if things don't go well there is no obligation as such to return it. Therefore, it does not generate indebtedness. If compared to other formulas more typical of startups in the seed phase, such as the FFF (Friends, Family and Fools), it can be said that venture capital has fewer emotional implications. The startup may fail and be a disappointment for a venture capital firm, but it will not be the same thing for the investor to lose their money (they are used to it) to having your friends and family do it. And if we go to the other side and find a startup in the growth phase, the great benefit of being financed through venture capital compared to an IPO is that the startup can keep operating independently. Some US companies close mega-rounds over and over again and continue to exist without stepping on the parquet floors.
Venture capital contributions that are not just money
It all depends on each venture capital firm or business angel and their philosophy, but many VCs not only provide capital to startups, but many other things. This is the main difference with other funding channels such as banks or public aid, which are mere capitalists. Investors can be crucial for the smooth running and scaling up of an entrepreneurial project, due to their business experience, their wide network of contacts and their orientation in decision-making. They can help co-founders to receive greater attention when it comes to knocking on certain doors, directing them to the right people to achieve contracts or business agreements, or channeling them towards certain objectives. Venture capital, however, requires some compensation. As a drawback for co-founders, in exchange for their financial contributions, VC firms are left with a share in the company's capital, which is popularly known as 'equity'.Some may be too abusive in this regard and demand too much percentage in the first rounds. Entrepreneurs should be cautious about this, because their shares can be diluted in a very short time and lose a lot of decision-making power. More: What are the differences between venture capital in Europe and in the US?What is a Business Angel, how is it different from a Venture Capital?
