Treibstoff Venture Capital (Fuel Venture Capital): Fueling innovation and economic growth

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Fueling innovation
and growth
Venture capital falls under the private equity asset class.
Corresponding investments are frequently made by
venture capital funds. These are funds that aggregate
capital from numerous different investors and invest
it in newly founded companies displaying strong
growth potential. Parties that invest in venture capital
funds include institutional investors like banks and
insurance companies, operative companies, government
funding agencies such as the KfW, and wealthy
private individuals. Given the uncertainty over the success
of growth companies and the high failure rate
among startups, venture capital investments are always
relatively high risk – hence the common synonym for
venture capital, ‘risk capital’. At the same time, the capital
gives young companies new chances for development
and growth, which is why it is also known in some
cultures as ‘opportunity capital’.
From seed to exit:
The typical phases of venture
capital funding
The term venture capital specifically describes the equity
and equity-like investments that flow into new
companies in the early stage, startup stage and later
stage of their development. Companies in the early
phase of their lifecycle need seed funding to get their
products and services ready for market. Then in the actual
startup stage, the point of market entry, companies
plan the (mass) production and distribution of their
market offering and initiate their marketing activities.
In the later stage, venture capital is mainly needed for
startups to be able to scale their business model – ‘scale’
meaning to elevate the quantitative parameters within
which the company operates (employee numbers, revenues,
customer base and so on) to a new level. It finances
the actions the company has to take to get itself established
in the market (such as expanding production,
distribution and marketing). New business ventures are
funded in a number of different rounds. The seed round
is followed by the series A and B rounds, when the company
is typically in the startup phase. Further funding
rounds (from series C onwards) mostly happen in the
later stage. It is in this final phase that successful startups
normally enter the profit zone, where the risk of
failure is low because the business model has already
been proven.
Venture capitalists often divest their holding following
successful later stage funding, or sometimes before. Their
exit can be effected by means of a trade sale (selling to a
strategic investor), an IPO (listing the company on the
stock market) or a secondary purchase (selling to another
private equity firm). →A
Capital and knowledge:
The economic benefits of venture
capital
From an economic perspective, venture capital is crucial
for the funding of startups. These types of companies can
promise investors neither security nor profits, putting
debt financing firmly out of reach for most of them – besides
the lack of collateral they have to offer, the need to
make capital and interest repayments would stretch a
startup’s liquidity situation beyond breaking point.
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