Venture capital is a form of financing provided by investors or investment firms to newly established or growing businesses. This type of financing offers opportunities for early-stage companies to secure the necessary funds to develop their businesses.
There are several types of venture capital financing that can be provided to companies, such as equity financing, debt-to-equity conversion, and financing through bonds. Each type of financing has its own unique mechanisms.
In this article, we will delve further into the types of venture capital financing and their mechanisms to help understand how venture capital works in supporting emerging businesses.
Venture capital financing can be categorized into three main types:
Based on Assistance Provision Terms
Single Tier Approach
Companies gather a certain amount of funds and allocate them by investing in the form of shares in other companies.
Two Tier Approach
Funds are managed by two separate entities: one company as the funder or fund company and another as the manager or management company responsible for handling the funds from the fund company.
Based on Fundraising Methods
Leverage Venture Capital
This is a form of venture capital investment made by the funding company by utilizing debt or loans as a source of investment funds.
In leverage venture capital, the funding company provides a certain amount of funds as a loan to the company in need. The recipient company then uses these funds to invest in other companies. This allows the company in need of funds to obtain additional capital without selling shares and still maintain full control over its business.
While leverage venture capital can provide advantages in terms of obtaining additional capital, it also carries significant risks due to the obligation to repay the loan with associated interest.
Equity Venture Capital
This is a form of venture capital financing done by purchasing shares of a company in need of capital. In equity venture capital, investors or venture capital firms provide funds to the company in a certain amount and, in return, receive shares of the company.
These investors then have the right to receive dividends from the company’s profits and make important decisions in managing the business. In many cases, equity venture capital investors collaborate with the company’s management to ensure business growth and achieve set goals.
While equity venture capital provides advantages in the form of ownership and potential long-term profits, it also carries risks as the value of shares can fluctuate depending on the company’s performance.
Based on Ownership
Private Venture Capital Company
Refers to companies whose shares have not yet been listed on the stock exchange, commonly known as being not publicly traded.
Public Venture Capital Company
In contrast to private venture capital companies, public venture capital companies have already sold their shares on the stock exchange.
Bank Affiliate Venture Company
A type of company managed by multiple banks due to surplus funds or common goals related to venture capital.
Conglomerate Venture Capital
Venture capital firms established by a number of large companies.
Venture capital is indeed crucial for business development. Therefore, many companies strive to obtain it through various strategies. After securing funding, the receiving company needs to accurately record its financial reports to detail and evaluate all aspects of its performance.
