Venture Capital is one of the most relevant sources of finance for innovative companies to fund their investments. Venture capital consists of funds raised on the capital market by specialised operators.
Venture Capital funds buy shares or convertible bonds in the company. They do not invest in order to receive an immediate dividend, but to allow the company to expand and ultimately increase the value of their investment. Hence, they are interested in innovative SMEs with very rapid growth rates.
| Equity financing entails: |
But: |
| Equity share |
Some loss of control |
| No security to be given |
A seat on the Board for the Venture Capital investor |
| No interest to be paid |
Strong financial discipline required |
| Added value (from experienced investors) |
Sharing the profits (on realising the investment) |
| Capital gain (on realising the investment) |
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Some Venture Capital funds specialise in certain sectors of activity (e.g. biotechnology, information technology...). Others may only intervene in certain stages in the development of your project/company. Generally, the following investment stages are distinguished (source: European Venture Capital Association):
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Seed finance, provided to research, assess and develop an initial concept before a business has reached the start-up phase.
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Start-up finance, provided to companies for product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their product commercially.
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Other early stage financing, to companies that have completed the product development stage and require further funds to initiate commercial manufacturing and sales. They will not yet be generating a profit.
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Expansion (or Development) finance, provided for the growth and expansion of a company which is breaking even or trading profitably. Capital may be used to finance increased production capacity, market or product development and/or to provide additional working capital.
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Mezzanine (Bridge) finance, made available to a company in the period of transition from being privately owned to being publicly quoted.
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Management Buy-out finance, provided to enable current operating management and investors to acquire an existing product line or business.
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Management Buy-in finance, provided to enable a manager or group of managers from outside the company to buy into the company with the support of Venture Capital investors.
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