What Makes Venture Capital Financing Attractive?

Venture capital (VC) financing is a type of capital investment made into companies that are early in their development, often not yet publicly traded. It is a form of financing that is often attractive to entrepreneurs, since it offers them the resources to successfully launch their new businesses without taking on as much financial risk. Below, we will discuss what makes venture capital an attractive financing option for entrepreneurs.

High Returns and Low Risks

One of the major draws of venture capital is the promise of high returns with relatively low risks. When an entrepreneur applies for venture capital financing, they often have to put up some of their own money as collateral, or “skin in the game.” Once the venture capitalists agree to make an investment, the entrepreneur’s risk is often reduced. Additionally, the potential returns on venture capital investments can be quite high—in some cases, up to 10x the original investment. According to the World Bank’s Private Participation in Infrastructure Database, investors saw an average annualized return of 18% on venture capital investments between 1990 and 2018. ^{[1](https://www.ppi-database.worldbank.org/data/report/venture-capital-performance-1990-2018)}

Flexible Financing Structures

Venture capital financing offers entrepreneurs flexible financing structures, which can make the process of raising capital much easier. Unlike conventional loans, venture capital investors are often willing to negotiate terms such as the equity stake they take, the loan terms, and the timeline for repayment. This flexibility allows them to tailor the financing to the entrepreneur's specific needs. Additionally, venture capital investors can also provide other forms of non-monetary assistance, such as mentorship and business advice, which can be invaluable for entrepreneurs in the early stages of their business.

Speed of Investment

Venture capitalists are usually very quick to make decisions, which means entrepreneurs can raise capital much faster than with traditional bank loans. In most cases, a venture capital investment can be completed in a matter of weeks or months, whereas a conventional loan can take more than a year to arrange. This makes venture capital financing a great option for entrepreneurs who need capital quickly and don’t have the time to wait for the lengthy loan application process.

Long-Term Partnership

When investing in a company, venture capitalists also often become partners or advisers in the business. This allows them to provide ongoing support and guidance to the entrepreneurs, which can help them make better decisions and increase their chances of success. Additionally, the long-term partnership between the entrepreneur and the venture capitalists helps to create a sense of trust between the two, which can be key when it comes to securing future funding.

Conclusion

Venture capital financing is a great option for entrepreneurs who are looking to rapidly launch their businesses. It offers them the opportunity to secure high returns with relatively low risks, flexible financing structures, fast and easy access to capital, and a long-term partnership with venture capitalists who can provide valuable advice and assistance.

References

1. The World Bank’s Private Participation in Infrastructure Database. Venture Capital Performance, 1990–2018, https://www.ppi-database.worldbank.org/data/report/venture-capital-performance-1990-2018 2. “Venture Capital and Angel Investment In India.” Niti Aayog, https://www.niti.gov.in/content/venture-capital-and-angel-investment-india 3. Haug, Alexander. “Venture Capital Basics: What Is Venture Capital?” Investopedia, 12 Feb 2021, https://www.investopedia.com/articles/investing/090515/venture-capital-basics-what-venture-capital.asp 4.Harvard Business School. “What Is Venture Capital?” Google, 4 Dec 2012, https://www.hbs.edu/entrepreneurship/what-is-venture-capital/ 5.University of Texas at Austin. “What is Venture Capital?” LibBusiness, 15 Feb 2021, https://www.utexas.edu/business/libbusiness/classes/remote/what-is-venture-capital.html