Capital invested in a young potential high-growth firm. The investment can consist of debt and private equity because directed to unquoted firms. In the U.S.A., venture capital includes both early stage financing and expansion financing, while in Europe the latter refers to private equity, and venture capital refers only to early stage financing. In general, the term venture capital does not cover management buy-outs and buy-ins, and it comprises the following types of financing:
- seedcorn: financing to allow the research and development of a business concept or product;
- start-up: financing to allow further development of a business that has started in the past years. At this stage, the initial marketing of a product not yet commercially sold is developed;
- early stage financing: funds to begin manufacture and sales. Companies can be still unprofitable and not breaking even;
- expansion: financing to allow expansion in production capacity, working capital and market or product development.
There are different suppliers of venture capital (venture capitalists): high net worth individuals, private partnerships and corporations that raise capital from institutional investors (pension funds, insurance companies, etc.), subsidiaries of large financial and industrial corporations (venture capital subsidiaries), or business angels. The reason behind the investment decision in a high risk early-stage venture is the high returns. Usually, a venture capitalist expect a return of between five and ten times their initial equity investment in about five to ten years.
ARNOLD G. (2002), Corporate Financial Management, Pearson Education
ROSS STEPHEN A., WESTERFIELD RANDOLPH W. and JAFFE J. (2002), Corporate Finance, McGraw Hill
Editor: Bianca GIANNINI
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