There are many ways you can finance your startup. Apart from bootstrapping or funding by business angel, the most common method is venture capital. Find out in this article what it means to finance your company with venture capital investments and what type of VCs there are.
What Is Venture Capital?
Venture capital is a sector of the private equity business where private equity firms invest into companies that are not listed on the stock exchange to profit from their earnings. In this context, venture capital can described as a time-limited investment of proprietary capital into young, innovative, and usually tech-based companies which are still growing a startupsnd not listed on the stock exchange – which might as well be the very definition of a startup!
How Does It Work?
A venture capital firm usually invests for a limited period of time during one of the startup growth stages.
The goal of this investment is to raise the value of the company as quickly as possible to be able to achieve maximum return for one’s own investment at the end of the pre-determined period. Within this period, some strategic investors additionally support aspiring companies with consulting services, industry expertise, and management know-how as to achieve the best possible development of the startup.
Currently, the German Private Equity and Venture Capital Association (“Bundesverband Deutscher Kapitalbeteiligungsgesellschaften” – BVK) has 300 members, 200 of which are private equity firms which in turn are predominantly comprised of venture capital firms. For founders, it’s not easy to find a “suitable” venture capital firm to partner with.
If the search was successful, however, and the startup was able to attract the interest of a venture capital firm, a non-disclosure agreement (NDA) is drafted. This agreement states that all information shared during the investment process is only used for the purpose of realizing said investment. Subsequently, the investor dives deeper into the business model, business plan, and the team make-up of the company to confirm the intention of investment.
If, in the end, the investor is convinced, usually a term sheet or a Letter of Intent (LOI) follows that details the conditions for the investment. Only then, the actual investment contract will be drafted – as well as other documents such as a shareholder agreement, the articles of association, and additional contracts. These documents then serve as the legal basis for the investor’s financial participation in the company.
Types of Venture Capital Investors
There are several types of venture capital investors. Here are four of the most usual:
- Venture Capital Firm
Most venture capital investors are traditional venture capital firms. By applying focused investment tactics, the firms set up VC funds which can be focused on specific industries or growth stages of companies. Once the foundation has been laid, the venture capital firm looks for investors to cooperatively invest into promising companies. - High-Tech Gründerfonds
The “High-Tech Gründerfonds” (high-tech founder’s fund) is a special type of venture capital focusing on technology-based startups. The fund is managed by the KfW bank, the German Federal Ministry of Economics and Technology (BMWi) as well as funded by private companies, such as Siemens and Bosch, and can handle a volume of around 300 million EUR. Startups which are relevant to the HTGF’s interest usually receive 500.000 EUR of investment volume during the seed phase in return for a 15% share of the company. - Venture Capital From State Development Banks
Most of the 16 state development banks in Germany also run investment companies which finance startups. Depending on federal state, these venture capital development banks might finance young, preferably tech-based companies. Such grants often are available starting at a 20.000 EUR investment volume. - Corporate Venture Capital
Corporate Venture Capital firms (CVCs) are subsidiaries of large corporations which handle strategic investments for the parent company. Most often, CVCs invest into companies that are working in the same industry as their parent company. Compared to traditional venture capital firms, CVCs not only work towards gaining financial returns but also towards furthering their parent company’s strategic goals.
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