VC Is: Definition, Mechanism, Process, and Types

Of course, those of you who work in the startup world are familiar with the term venture capital. Venture Capital is a financial institution that finances start-up companies. The existence of venture capital or commonly abbreviated as VC is very important for the current startup ecosystem. Of course, startups without venture capital can face financial difficulties.

What exactly is venture capital? Don't worry, we'll explain it below. 

What is Venture Capital (VC)?

Venture capital or risk capital is a form of equity and financing for investors to startups they believe have long-term growth potential.

According to Tony Lorenz, VC is a long-term investment that provides venture capital where investors (financiers) primarily expect capital gains. According to Robert White, VC is a financial business that enables the creation and development of new technology and/or non-technology companies.

Based on Presidential Decree (OJK) Financial Services No. 61 of 1988 concerning Financial Institutions, venture capital companies are business entities that finance business activities in the form of equity participation in a company and receive financing support for certain companies. 

Venture capital usually comes from wealthy investors, investment banks and other financial institutions. However, this is not always in the form of money, it can also be in the form of technical or managerial expertise.

In venture capital transactions, most of the company's holdings are formed through independent limited partnerships and sold to multiple investors, sometimes formed by the venture capital firm of several similar companies.

There is a difference between venture capital and other private equity deals in that venture capital tends to focus on new companies looking to raise large funds for the first time. At the same time, private equity tends to finance larger, more established companies.  

Venture Capital Mechanism

There are at least three elements directly involved in this venture capital mechanism, namely:

1. Capital owners who expect a high return on investment. This capital comes from various sources or investors who are collected in a special forum or institution that is formed and is called a venture capital fund.

2. Professionals who have expertise in investment management and are looking for a potential type of investment. These professionals can be institutions known as management firms or venture capital funds.

3. Target companies are companies that need capital for business development and are financial companies. 

Venture Capital Process

The first step a startup must take to attract investor funds is to submit a business plan to a venture capital company or angel investor.

If the proposal submitted succeeds in attracting investor interest, the company or investor will carry out due diligence, which includes a thorough investigation, for example the company's business model, products developed, company management, and history of operations.  

Types of Venture Capital

Private equity offers different types of financing, each with different specifications. You can see a more detailed discussion of the various types of business capital below.

Seed Capital

The first is start-up capital, the kind of early-stage startup that doesn't have a product or isn't well organized. Since these startups are still in their early stages, venture capital usually provides only a small amount of funding and can be used for various purposes such as making product samples.

StartupCapital

The next capital is startup capital. This is used to fund startups that already have their own products. Therefore, start-ups are usually provided with funds for recruiting teams, market research, and also for the completion of these startup products or services.

Early Stage Capital

The next type of venture capital is early stage capital. By now, a startup should have a complete organizational structure and also grow over the next 2-3 years with good revenue statistics. Typically, venture capital funding is used by startups to increase productivity.

Expansion Capital

The next type is expansion capital. This type of funding is given to startups that are already established and ready to grow. 

Late Stage Capital

This type is startup funding that has an impressive track record. Funds provided are usually used to expand capacity and also to obtain venture capital.

That was the discussion about venture capital. Hopefully this article will provide more or less benefits for those of you who are currently looking for funding from venture capital.