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It is very important that you know what venture capital is along with other financing terms if you are going to seek financing.  If you aren’t clear on the terms, you will not look like you have done your research and know what you are doing. This article explains some of the differences.

Do You Know What the Difference is Between Venture Capital, Private Equity, and Debt Capital?

By Ivan Faucon

Have you ever heard the terms “venture capital” or “private equity?” Well, if you are starting a business, you will need to know what kinds of investors you need to contact and the difference between venture capital, private equity, debt capital, and how investors are categorized. You will also need to know about what conditions different forms of capital is distributed to aspiring entrepreneurs.

Debt Capital

What is debt capital? Well, you can think of debt financing as a loan from a bank that you have to pay back with interest. In reality, that’s exactly what debt capital is. Many entrepreneurs often resort to getting some debt financing to start their business. Debt capital, depending on its size, can be obtained from your regular bank or if it is a large sum of money, you might have to go to a special bank known as an investment bank. As far as the investor who is giving you the debt capital is concerned, debt financing is a much lower risk investment compared to equity capital. This is because debt capital is funding that is lent to you, just like as if you are taking a loan out for a car or a mortgage on your home.

What is the interest rate on debt capital? In most cases, when in investor who invests debt capital to a budding company, he expects to make at least ten percent off of the sum that was invested into a given company. Furthermore, debt financing is usually given to those entrepreneurs, who the investor believes is most likely believes will pay the debt off in due time.

Equity Capital

Equity capital, on the other hand, is different because unlike debt capital; you do not need to pay anything back to the investor. Equity capital is funding that practically every company gains as its business grows. Equity is usually invested out of a particular fund and is classified as either private equity and venture capital.

Private Equity and Venture Capital

Basically, private equity is an equity fund that belongs to either privately owned institutions or private individuals. Usually private equity is invested by institutional investors, who are people that specialize in investing private equity from such institutions. Institutional investors usually work for a private equity or PE firm that manages private equity. Venture capital is also private equity but is managed slightly differently than private equity. Venture capital is actually private equity that is usually reserved for investments to companies that have the potential for high growth.

For those of you who need financing and do not want to have to worry about debts, you would like to have some kind of equity capital, be it private equity or venture capital. This funding is much better than debt capital, because unlike debt capital, you do not have to pay the investors back. Instead, with equity funding, an investor makes money when a company cashes out. This usually means that when a company is bought by another company or is prepared for public offering, that is when equity firms make their money. The other side of the coin, however, equity capital is a much more risky investment for the investor than debt financing, because with equity capital, an investor makes money only with a buyout, initiate public offering or IPO, or an exit strategy.

Investors

As mentioned before, there are different investors and investing institutions. Some investors are wealthy individuals who invest their own money to entrepreneurs whom they like, whereas others work for institutions, such as private equity or venture capital firms and invest money from their institutional funds.

Angel Investors

Angel investors are wealthy private individuals who invest their money into a given entrepreneur for whatever reason. Some angel investors invest in a particular company because they might like that particular entrepreneur or feels charitable and wants to share their own entrepreneurial experience with other budding entrepreneurs to get on their feet. Other angels might invest in a company because a particular company might fit into that angel investor’s values, ethics, or other personal interests. If you have a wealthy relative and he invests in your company simply because he wants to help out a member in his family, he is also an angel investor.

Venture Capitalists and Institutional Investors

Unlike angel investors, venture capitalists and institutional investors do not invest their own money. Institutional investors usually work for a private equity firm and invest equity from funds that are usually parts of a pension fund or other types of funds. Venture capitalists are investors who solely invest in venture capital and work for venture capital firms.

Where Does the Money Come From?

Well, that is a good question. In the case with most successful private equity and venture capital firms, the money for investments comes from venture funds that these firms have raised. When a venture capital or private equity firm is successful with their investments, they are able to raise new funds for future investments. Again, as mentioned before, equity investors cash in on their investments when a company is liquidated by either being bought out from another company, etc.

How Do You Contact Investors?

There are many ways you can contact investors, but any way you look at it, the task involves a lot of finger walking. There are directories available that can help you find investors easily. One of these databases is the VCgate Venture Capital Database, which can be found at www.vcgate.com.

Ivan Faucon writes about venture capital and entrepreneurs. He will also occasionally write about other business topics, such as consumer goods, jewelry, and internet marketing.

Article Source: http://EzineArticles.com/?expert=Ivan_Faucon
http://EzineArticles.com/?Do-You-Know-What-the-Difference-is-Between-Venture-Capital,-Private-Equity,-and-Debt-Capital?&id=3174185

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Venture Capital – Funding in the Recession

By Thomas Ajava

As you might imagine, the recession and implosion of the credit markets has had just a tad of an effect on the venture capital and angel investor markets this year. For those considering start-up businesses or expansion, the forecast is decidedly mixed.

I don’t have to tell you that the implosion of 2008 and 2009 resulted in the near strangulation of many niches of the financial markets. Oddly, venture capital investing was not one of those markets that was rocked to its core. Don’t get me wrong. Things were bad, but the downturn in venture capital investing was in the teens as a percentage instead of a much larger number as with most markets. Angel investing, sadly, was crushed for the most part with rates dropping by 30 percent or more.

Well, enough about the past. What about the future? After all, we’ve all read and heard we are now in a recovery from the Great Recession. To say it is a tepid recovery might be a mild understatement. The simple fact is the financial world is still at a stand still. For example, more banks have failed in 2009 than all of 2007 and 2008 combined. That doesn’t make for a solid platform from which to launch 2010. So, what can we expect?

2010 is going to be a brutal year for start-ups. Venture capitalists are risk adverse at the moment, which means few will be interested in taking on the risk of a brand new business. Unless you have a proven record turning start-ups into big winners, don’t hold your breath on VC funding. The same goes for angel investing. The year is going to be about family and friend investing or simply waiting until things turn in the venture capital markets.

What about existing businesses looking to take that next step? VC companies and angels are going to be much more receptive towards inquiries from companies that have a history. That doesn’t mean they will be handing over money right and left, but it means you have a chance. As usual, it comes down to whether your idea seems plausible to them at a time when things are very tough.

The venture capital markets are not dead. Not even close. That being said, there are a lot of fish competing for the food in that market. Things will eventually loosen up, but it may be some time before that happens.

Thomas Ajava writes about venture capital funding for VentureCapitalInvestmentFirms.com where you can find venture capital investment firms for your start-up or existing business.

Article Source: http://EzineArticles.com/?expert=Thomas_Ajava
http://EzineArticles.com/?Venture-Capital—Funding-in-the-Recession&id=3357755

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