What is venture capital?
Generally speaking, venture capital is long-term investment into an enterprise’s unlisted equity or provision of equity related loan with the purpose of supporting its rapid growth and development. This type of investment conceptually differs from raising finance in a form of an ordinary loan. If you get an ordinary loan then you have an obligation to repay the principal and accrued interests irrespective of your success or failure, so in this case the lender is not the one who shares your repayment risk. Risk capital investor’s approach is absolutely different, because his or her return is heavily dependent on the prosperity and profitability of your enterprise. Thus, risk capital investment allows you to share and adjust risks associated with the performance of your business and cash flows between you and your lender.
If we consider contemporary investment universe as consisting of two major parts, traditional and alternative, then risk capital will definitely fall into the second category. The main character, which makes risk capital fundamentally different from other types of financing, is the fact that your lender becomes your business partner, who shares your interests, risks and to the certain amount your profit. Strictly speaking, risk capital is not a kind of ordinary bank loan, instead it is the amount of money which investor is ready to change against your equity or equity related debt if he is confident in your future success. It is important to note that risk capital can be both in a form of equity and loan financing, but the latter will eventually be related to the equity of your enterprise. The key fact to mention is that for the purpose of risk capital, equities of your enterprise, which are directly related to the financing, cannot be listed or otherwise traded publicly, instead all transactions with the investor will be of a private nature. This feature makes risk capital available to wide range of enterprises – not only for large companies, but also for medium, small and even micro-enterprises who are not able to offer their equities or debt publicly.