Alternatively, the company is developed enough so that it can be acquired by a larger firm in the same industry. The return comes five or six years later when the company has had time to establish itself and develop a plan for an initial public offering, or IPO. Part of the agreement to invest in a startup is usually one or more seats on the board of directors, so venture capital firms must actively work for their payment. Money from these groups comes in installments as the company meets certain agreed-upon milestones in its development. A venture capital firm agrees to invest in the idea after spending time investigating the prospect and making sure that the risk is worth the potential return. Investors in startup companies begin with little more than a group of talented people and an idea for a company that could become the next Apple or Facebook. This difference makes these types of active financing riskier than commercial lending, but also gives them more bargaining leverage when it comes to returns on investment. Financing sources such as venture capital, angel investing and private equity are different than lending from commercial banks because they don’t require existing equity as collateral, according to Investopedia. Angel investors, especially, tend to take an active interest in the ideas of young entrepreneurs because, most of the time, these investors were once young entrepreneurs themselves who built successful companies and became wealthy by selling their shares of the firm. Usually, the companies receiving capital have big ideas and a strong business plan, and the venture capitalism firms and angel investors listening to their proposals see the potential for big rewards. It’s similar to another commonly used term, angel investor, which refers to an individual who provides starting capital to a young, unproven company. Venture capital is money invested in a startup company in exchange for partial control of the company as well as shares of stock as they company grows in value. If you follow the technology industry, you’ve probably heard people talking about venture capitalism, and you may wonder what it is.
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