Nochd - Trust & Banking

Venture capital is the term used when an investor buys part of a company. An investor agrees to place cash or assets at the disposal of a company.

A venture capitalist invests money in a company that has an element of risk with high growth potential, usually for a period of five to seven years, looking to make a healthy return.

The investor will expect a return on his money either by the sale of the company or by offering to sell shares in the company to the public at the anniversary of the pre-agreed exit strategy.

When investing venture capital, the investor will want to receive a percentage of the company’s equity. The equity may be as low as 15% or even exceed 50% (dependent upon risk to return ratio) and more than likely the investor will wish to have one or more positions on the director’s board.

There are three main different types of venture capital investment,

Early Stage financing includes seed financing, start-up financing and first stage financing.

Seed financing refers to a small amount of venture capital given to an entrepreneur or inventor who wishes to start a business. It may be used to build a management team, for market research or to develop a business plan.

Start up financing refers to venture capital that is given when a business has been operating for less than a year. Their product may not have been sold commercially yet, and they may just be ready to start.

First stage financing is used when companies wish to expand their capital and to proceed to enter the public business arena.

Expansion financing, covering second and third stage financing and bridge financing.

Second stage financing is an investment used to expand a company that is already on its feet. The company is trading and has growing accounts and inventories, although it may not yet be showing a profit.

Third stage financing is an investment to companies that are breaking even or becoming profitable. The venture capital is used to expand the business. It may be used in the acquisition of assets or further in-depth product development.

Bridge, Acquisition financing

Bridge financing covers a variety of different meanings.

It is typically a short term, interest only investment. It is used when company restructuring is taking place. The money can also be used if an initial investor wants to liquidate his position and sell his stock.

Acquisition financing is when the investment is used to acquire a percentage or the whole of another company. Venture capital can also be used by a management group to buy out another a line of products or business, regardless of their stage of development. The company they buy out can either be a private or a public company.