Venture capital funds for startups. How do they work?


What are the benefits of a venture capital funds for startups? Who in particular should consider this form of support? What risks does venture capital pose for start-ups? The answers can be found in this article.

Venture capital funds for startups. Table of contents:

  1. Venture capital funds for startups — what are these?
  2. Who is venture capital for?
  3. The advantages of venture capital funds for startups
  4. Risks of venture capital funds for startups

Venture capital funds for startups — what are these?

By definition, venture capital funds are a form of external financing obtained in exchange for the temporary allocation of shares in the financed company. The investor in this case is an entity that wants to optimize the return on the capital it has at its disposal by investing it in a business with significant growth trends. Thus, venture capital is an attractive form of financing for innovative startups with limited financial resources, compensated by high growth potential.

Who is venture capital for?

Startups with growth trends

Venture capital is dedicated especially to business entities with an established business model and significant growth potential. Therefore, it is necessary that the entity applying for funding in this form has some market experience giving investors a guarantee of intensive business growth.

Startups from certain industries

Often chosen directions of investment are technology, biotechnology and information technology industries. It is important for the capital recipient to demonstrate specific competitive advantages, which are the basis for the investors’ interest. They may manifest themselves e.g. on the level of products, services, prices, management or market.

Startups which know how to prove their profitability

Equally important is the proper shaping and presentation of the project to be financed. Venture capital funds for startups are a risky investment that requires convincing the investor of the profitability of its capital commitment. Therefore, a VC fund is a suitable proposal for companies with visionary schemes, which are often too risky in the eyes of traditional banking institutions.

The advantages of venture capital funds for startups

Financial aspects

Among the benefits of venture capital fund support, the financial aspect of the investment definitely comes to the fore. Innovative companies thus obtain capital that is often not available to them from other sources, and which can greatly accelerate the development of the company and its undertakings. All this without having to establish any collateral, which is often a big problem for companies with limited material resources.

Financed entities are also not obliged to make regular, interest-bearing installments — the investor receives the benefit in the form of dividends. The costs are therefore directly proportional to the profits that the company obtains.

Strong startup image and stability

Startups using venture capital funds get much more than just a cash injection. Investors are often entities with an established position in the market, with a large database, know-how, contacts, infrastructure, proven logistics channels and support from specialists.

The risk taken by the investor means that he cares about the success of the project — so you can count on his extensive support, which translates directly into the benefits obtained by him as a shareholder.

A VC fund is a form of financing that guarantees stability for startups. The cooperation is established during their growth phase, which bodes well for the cooperation with the investor, who will probably want to continue financing the venture. However, even if his stance were different, withdrawing from the transaction without consent on both sides will not be easy.

When it comes to the costs of this type of financing, they certainly do not exceed the benefits, as the share in the company’s profit is the remuneration for the investor.

The fact that they have chosen to bet on a particular business builds its image as a promising one — and this in turn can attract further investors. An improved capital structure also increases creditworthiness, which can further accelerate growth.

Risks of venture capital funds for startups

Despite the above-mentioned benefits, which can be gained by establishing cooperation with VC funds, also this form of financing is associated with certain limitations on the part of the capital recipient.

Increased investor control

This is because in this case, the financier becomes a shareholder in the company, thus acquiring a certain package of privileges, reducing the original degree of control over the company.

Therefore, venture capital funds for startups require the necessity to pay dividends, share power in the company, and consult decisions with the investor.

Implementation constraints

The time required to implement this form of financing, which is usually about a year from the date of contact between the parties to the transaction, also speaks against VC funds.

High risk comes with relatively high costs. The average rate of return expected by the investor, in this case, does not go below the threshold of 30%.

The increase in the company’s value is also reflected in the price of shares, which the investor acquires much more cheaply in the initial phase of growth.

Want to stay in touch with our content? Join our Facebook community

Leave a Reply

Your email address will not be published. Required fields are marked *

Available for your Smartphones

Manage projects & make sure your team is working efficiently. Firmbee mobile app will help you organize and accelerate remote work.