Venture capital is a kind of private equity investment typically made in new or growing companies to provide for the early stage capital requirements, or for a planned expansion. Venture funding fills an essential role in assisting enterprises in circumstances when their access to other forms of finance are limited, often because of the difficulties in matching the risk profile to a more established business model.
Venture capital typically has a role in funding:
- product development
- supplementing the capital requirements of self-funded entrepreneurs
- start up ventures
- technology, biotech and healthcare ventures and
- traditional businesses
Venture capital plays a crucial role in funding ventures which would not ordinarily be able to attract debt funding from traditional sources due to the lack of a track record or other evidence which would allow the better qualification of risk, and a more confident prediction of cash flows.
The relatively high risk taken on by the venture capital investors is managed by spreading the funding contributions across a number of investors, and spreading the investments across industry sectors. The upside is theoretically a higher rate of return, although that hasn’t always been true.