Venture capital is a type of private equity capital typically provided for early-stage, high-potential, and growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.
There are several types of venture capital that are extremely crucial in the context of the modern day business world. The types of venture capital are classified as per the purpose and time of their application.
The 3 principal types of venture capital are early stage financing, expansion financing and acquisition/buyout financing.
Types of Venture Capital:
There are several different types of venture capital.
These distinctions refer to the timing of the investment or its specific purpose within the life of the target company, but the need for a high return in exchange for the risk remains constant. There are three major types of venture capital – early stage financing, expansion financing and acquisition or buyout financing. The various types of venture capital are classified as per their applications at various stages of a business.
Early Stage Financing:
Early stage financing has three sub divisions seed financing, start up financing and first stage financing. Seed financing is basically a small amount that an entrepreneur receives for the purpose of being eligible for a start up loan.
Start up financing is given to companies for the purpose of finishing the development of products and services. However, this type of venture capital may also be used for initial marketing as well. Companies that have spent all their starting capital and need finance for beginning business activities at the full-scale are the major beneficiaries of the First Stage Financing.
Expansion financing may be categorized into second-stage financing, bridge financing and third stage financing or mezzanine financing. Second-stage financing is provided to companies for the purpose of beginning their expansion.
Second-stage financing is also known as mezzanine financing. It is provided basically for the purpose of assisting a particular company to expand in a major way. Bridge financing is useful in many ways. It may be provided as a short term interest only finance option as well as a form of monetary assistance to companies that employ the Initial Public Offers as a major business strategy.
Acquisition or Buyout Financing:
Acquisition or buyout financing is categorized into acquisition finance and management or leveraged buyout financing. Acquisition financing assists a company to acquire certain parts or an entire company. Management or leveraged buyout financing helps a particular management group to obtain a particular product of another company.