What Is A Venture Capitalist?
Bootstrapping in business defines the concept where business owners run and fund their businesses or companies, using solely personal finance or generated revenue, without necessarily sourcing for external financial help. The other side of the coin has it that not all entrepreneurs have the wherewithal to foot the bills and enjoy this luxury. So as opposed to bootstrapping, there is the concept of “venture capitalist” that helps with business funding.
A venture capitalist (VC) stands as a figure (or figures) that seeks to help meet the financial needs of businesses for mutual gains — venture capitalists are private capital investors in companies with a high growth potential, usually startups and small-scale types, in exchange for a sizable equity stake. Investments, in this case, are usually made in cash, so that, in return, a share of the company is owned by the venture capitalist.
The high risk of failure that hovers around startups and many small-scale businesses, makes it difficult to borrow from banks. The VC steps in to shoulder the responsibility and take the investment risk while providing not just funds, but strategic plans to ensure that the businesses invested in, become a success.
How Does A Venture Capitalist Operate?
It is highly unlikely to have a venture capitalist invests his funds in businesses. More often, venture capitalist operates as a firm with a team whose collective contributions and ideas are geared towards how the accumulated funds from other investors, wealthy individuals, and some private contributors, should be staked in promising enterprises for a long-run return of investments (ROI).
Venture capitalists firms come in when the traditional financial structures like pension funds, insurance companies, banks, and other financial institutions, are outrightly unwilling to offer financial support from a place of perceived risk. The goal of the VC here is simple; to bridge the gap between companies in need of funds, and the needed funds to thrive.
Venture capitalists invest in companies in their budding stage, then collect good returns of investment when the company becomes successful. It doesn’t end just here, the VC firm strikes a healthy balance as they split time between nurturing and providing ideas to companies they have invested in, and searching for companies to invest in.
An agreement is signed between investors and the venture capitalist firm on what should be, at the end of the turnout of events; the percentage in which future equity stake should be shared. Worthy to mention also, is the erroneous perception that venture capitalists are solely about startups and small-scale businesses, as opposed to the actual bigger market landscape they occupy, which stretches up to large businesses in need of funding to retain adequate functionality.
What Is The Difference Between A Venture Capitalist And Private Equity Investor?
The difference between a venture capitalist and a private equity investor is dependent on the stage at which the company or business to be invested in, is. More precisely, a venture capitalist offers financial support to businesses when they are in dire need of substantial financing, not always at their early stage, whereas private equity investors offer financial services to businesses that are already in a state of good financial flow, for expansion purposes.
What Are The Advantages Of Venture Capitalist?
- Business ownership stake reduction
- Increased conflicting interest possibility
- Difficulty in finding a venture capitalist
1. Business ownership stake reduction
A big disadvantage on the side of a startup business owner rests on the occurrence of the need for increased funding in the long run, which can be much higher than the initial agreed funding, and with this, comes the rise of a venture capitalist’s equity stake. Thus, reducing the ownership stake of the business owner.
2. Rise of conflicting interest
The venture capitalist, to a good extent, depending on the capital invested, secures a place among the company board members. This becomes a problem if the interest of the initial business owner conflicts with that of the venture capitalist in the event that a decision is supposed to be made.
3. Difficulty in finding a venture capitalist
It is pretty much difficult to find a venture capitalist or a firm that operates as one. Especially for businesses and startups with little or no connection and weak networking systems.
What Are The Advantages Of Venture Capitalist?
- Business owners don’t have to bootstrap
- Business owners aren’t liable for debt repayment
- Establishment of valuable networking
1. Business owners don’t have to bootstrap
Bootstrapping is but a luxury that can only be enjoyed by startups and businesses with sound financial capital. A venture capitalist becomes advantageous to businesses with weaker financial structures, as the much-needed financial aid for business progression is provided for fair compensation.
2. Business owners aren’t liable for debt repayment
Business owners are not saddled with the responsibility of repayment in the event that the business takes a negative turn. This is as opposed to other financial institutions like banking systems, where, no matter what, debt repayment is compulsory, as there would have been collaterals at stake.
3. Establishment of valuable networking
Venture capitalists exude a rich dose of expertise and experience in the business ecosystem, such that with relative ease, business owners have a pretty high chance of better networking and having their businesses promoted via top-notch marketing strategies tapped from the networking juice of the said venture capitalists.
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The venture capitalist (VC) concept finely stretches across the business landscape, in a way that allows business owners and venture capitalists to have a clear view of its pros and cons, thus, allowing them to make credible decisions from an informed place. A venture capitalist can lose invested funds upon business downturn, and business owners can also, in the process, lose a huge chunk of their businesses via signing unclear transactions. This means, whether or not any of the parties would consider this partnership, should come from a clear understanding of what it all entails.