Venture Capitalism

You and your friends have been meeting at the nearby coffee shop everyday for a few months now, you spend hours discussing your product and go home only to get back in front of your screens and continue working on your idea. Eventually you hit a roadblock, you and your friends have the skills and the drive to give this idea to the world but you are in dire need of capital. How do you get this capital? who do you go to? this is where the venture capitalist comes in.

Venture capital is a form of private equity and a type of financing that an investor provides such capital usually comes from well off investors that can afford to take the risk of investing in a small company, or sometimes just an idea. But why would an investor give you his precious money? well for starters you will have to convince him that your idea has potential for growth and can really shape up to be a profitable company. If the investor is convinced he will give you your capital but in return he will take part ownership of the company and will hence have a say in the future decisions of your company.

But how does the investor get convince? after you present the business plan, the investor then performs due diligence, which includes a thorough investigation of the company's business model, products, management, and operating history, among other things. He also performs quick calculations as to what will be the Return On Investment (R.O.I), payback period and the Net Present Value (N.P.V) of the company, a key point to note is that while the formulae for these metrics might be well defined the actual value one calculates will depend on his expected rate of return, how long he can stay vested and how much he can afford to risk.

Congratulations! now you and your investor have shaken hands on the terms of funding and you have received your seed fund and you are on your way to rocking the business world with your startup. You rent a new office, fill it up with tables and chairs and begin hiring. After a few quarters you realize that your company needs more funding. Now you can either ask your original investor for more money or find a new investor or maybe go to angel investors.

Angel investors are usually self made big shots of their respective fields and are high net-worth individuals i.e. crazy rich people. These investors usually invest in field that they have an idea of and also provide mentoring the entrepreneurs. It is also very common for startups to give part ownership of their company to people with technical, managerial or industry experience in exchange for their guidance and to have them on their board.

Now your company is set up and it has a board of directors who are invested in the company's future. Of course some of them might sell their share of the company to a different investor and pull out of the company, or may appoint somebody else to sit on your board. The future has its own uncertainty, but now you have the all important capital that you needed to bring your idea to fruition.