Understanding the venture capital cycle
Oftentimes, venture capital firms and funds tend to invest into these start-ups for an exchange of equity or ownership in the companies they wish to invest in. Based on this, venture capitalists are often at high risk, considering the fact that financing start-ups can be quite risky, especially if the companies in question fail to achieve their growth potential. At this moment in time, most of the companies that receive VC funds are often based on a new type of innovative technology, or follow an interesting business model. Oftentimes, they are also related to high technology industries, such as IT, biotechnology or social media.
Most of the times, the first venture capital investment follows the initial seed funding round. The main interest of a VC is to generate a stake that then provides them with profit, or to benefit from the selling of shares once the company in question decides to go public and submits their initial public offering, also known as the IPO, or goes through either a merger or acquisition.
Therefore, once a new start-up sprouts on the market, it’s likely that it will require some additional capital, which is why it will follow through the initial funding round, and then begin accepting investments from venture capitalists. The companies then proceed to use these funds to market their services, hire more people, come up with new services and products, hence increasing their overall profits.