Venture Capital

Concept summarized by Sam Mishra, MBA (MIT Sloan)

Equity funding for a start-up to grow its business / venture is known as Venture Capital.

Typically, venture funding is solicited by a team of high-tech / bio-tech entrepreneurs to enable them to start their business in high gear. A venture capitalist (VC) is one who brings not only capital, but also his connections etc. to a start-up. That is why VC money is also considered smart money.

Increasingly in Silicon Valley and other high-tech / biotech hubs such as Boston Route 128, entrepreneurs who don’t want to dilute their stake in the business are resorting to debt funding as opposed to equity funding. Typically, debt terms require the entrepreneurs / VCs / business owners to pay-up the debt first to the creditors, putting debt financiers at loggerheads with VCs.

In general, start-ups with no or little revenue should go for equity as opposed to debt, because debt interest payments can be financially taxing when there is no cash-flow from revenue.

However, start-ups with some revenue / cash-flow should always consider venture-debt as opposed to venture-equity as a means of further funding, as long as the debt component is a small fraction of the overall company valuation.

The negative term for a VC or venture capitalist is vulture capitalist.

Also see Seed Money, and Angel Funding.