Venture capital

During a seed round, entrepreneurs seek investment from angel investors, venture capital firms, or other sources to finance the initial operations and development of their business idea.

Venture capitalists provide this financing in the interest of generating a return through an eventual "exit" event, such as the company selling shares to the public for the first time in an initial public offering (IPO), or disposal of shares happening via a merger, via a sale to another entity such as a financial buyer in the private equity secondary market or via a sale to a trading company such as a competitor.

Venture capital is also a way in which the private and public sectors can construct an institution that systematically creates business networks for the new firms and industries so that they can progress and develop.

This institution helps identify promising new firms and provide them with finance, technical expertise, mentoring, talent acquisition, strategic partnership, marketing "know-how", and business models.

[6][7] Georges Doriot, the "father of venture capitalism",[8] along with Ralph Flanders and Karl Compton (former president of MIT) founded ARDC in 1946 to encourage private-sector investment in businesses run by soldiers returning from World War II.

The compensation structure, still in use today, also emerged with limited partners paying an annual management fee of 1.0–2.5% and a carried interest typically representing up to 20% of the profits of the partnership.

[19] Venture capital firms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary of this new kind of investment fund.

In 1978, the US Labor Department relaxed certain restrictions of the ERISA, under the "prudent man rule"[note 2], thus allowing corporate pension funds to invest in the asset class and providing a major source of capital available to venture capitalists.

Internet IPOs—AOL in 1992; Netcom in 1994; UUNet, Spyglass and Netscape in 1995; Lycos, Excite, Yahoo!, CompuServe, Infoseek, C/NET, and E*Trade in 1996; and Amazon, ONSALE, Go2Net, N2K, NextLink, and SportsLine in 1997—generated enormous returns for their venture capital investors.

Venture capitalists also are expected to nurture the companies in which they invest, in order to increase the likelihood of reaching an IPO stage when valuations are favourable.

These funds are typically managed by a venture capital firm, which often employs individuals with technology backgrounds (scientists, researchers), business training and/or deep industry experience.

[40] A core skill within VCs is the ability to identify novel or disruptive technologies that have the potential to generate high commercial returns at an early stage.

[45] This model was pioneered by successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any individual firm or its product.

For entrepreneurs seeking more than just funding, startup studios can be an appealing alternative to venture capitalists, as they provide operational support and an experienced team.

To achieve this, or even just to avoid the dilutive effects of receiving funding before such claims are proven, many start-ups seek to self-finance sweat equity until they reach a point where they can credibly approach outside capital providers such as venture capitalists or angel investors.

Traditional crowdfunding is an approach to raising the capital required for a new project or enterprise by appealing to large numbers of ordinary people for small donations.

While such an approach has long precedents in the sphere of charity, it is receiving renewed attention from entrepreneurs, now that social media and online communities make it possible to reach out to a group of potentially interested supporters at very low cost.

[61] In industries where assets can be securitized effectively because they reliably generate future revenue streams or have a good potential for resale in case of foreclosure, businesses may more cheaply be able to raise debt to finance their growth.

In many of these regions, with less developed financial sectors, venture capital plays a role in facilitating access to finance for small and medium enterprises (SMEs), which in most cases would not qualify for receiving bank loans.

For instance, in the UK, 4% of British investment goes to venture capital, compared to about 33% in the U.S.[72] VC funding has been shown to be positively related to a country's individualistic culture.

[citation needed] The basic incentive available to any Canadian corporation performing R&D is a refundable tax credit that is equal to 20% of "qualifying" R&D expenditures (labour, material, R&D contracts, and R&D equipment).

[citation needed] In 2022, the Information and Communications Technology (ICT) sector closed around 50% of Canada's venture capital deals, 16% were in the Life Sciences.

[78] The Venture Capital industry in Mexico is a fast-growing sector in the country that, with the support of institutions and private funds, is estimated to reach US$100 billion invested by 2018.

[93][94][95] As of 2024, tighter financial conditions have harmed venture capital funding in the European Union, which remains undeveloped in comparison to the United States.

[97][99] The European Green Deal has fostered policies that contributed to a 30% rise in venture capital specifically for greentech companies in the EU from 2021 to 2023, despite a downturn in other sectors during the same period.

[110] In the Indian market, venture capital consists of investing in equity, quasi-equity, or conditional loans in order to promote unlisted, high-risk, or high-tech firms driven by technically or professionally qualified entrepreneurs.

[114] Singapore is widely recognized and featured as one of the hottest places to both start up and invest, mainly due to its healthy ecosystem, its strategic location and connectedness to foreign markets.

For instance, in 2016, Singapore's National Research Foundation (NRF) has given out grants up to around $30 million to four large local enterprises for investments in startups in the city-state.

Singapore's tech startup scene has grown in recent years, and the city-state ranked seventh in the latest Global Innovation Index 2022.

The South African Government and Revenue Service is following the international trend of using tax-efficient vehicles to propel economic growth and job creation through venture capital.