Venture Capital Definitions 101

Venture Capital Definitions 101 

1. Some useful definitions, taken from Investorwords.com,

Venture Capital (once called risk capital) = funds made available for startup firms and small businesses with exceptional growth potential (managerial and technical expertise are often also provided).  Money made available for investment in innovative enterprises or research, especially in high technology, in which both the risk of loss and the potential for profit may be considerable.

2. Some related terms: Angel investor = an individual who provides capital to one or more startup companies; one who is usually affluent or has a personal stake in the success of the venture.  Add-on service = the non-monetary services provided by a venture capitalist, such as helping to assemble a management team and helping to prepare the company for an IPO. Adventure capitalist = an entrepreneur who helps other entrepreneurs financially, and often plays an active role in the company’s operations (such as by occupying a seat on the board of directors. Corporate venture capital = a subsidiary of a large corporation which makes venture capital investments. Mezzanine financing = late-stage venture capital, usually the final round of financing prior to an IPO. IPO (Initial Public Offering) = the first sale of stock by a company to the public.

3. Below is a general sequence of VC investing, taken from SearchSMB:

“Venture capital is the second or third stage of a traditional startup financing sequence, which starts with the entrepreneurs putting their own available funding into a shoestring operation. Next, an angel investor may be convinced to contribute funding. Generally an angel investor is someone with spare funds and some personal or industry-related interest – angels are sometimes said to invest “emotional money,” while venture capitalists are said to invest “logical money” – that is willing to help give the new enterprise a more solid footing. First-round venture capital funding involves a significant cash outlay and managerial assistance. Second-round venture capital involves a larger cash outlay and instructions to a stock or initial public offering (IPO) underwriter, who will sell stock in exchange for a percentage of what is sold. Finally, in the IPO stage, an investment bank is commissioned to sell shares to the public.”