Mechanics and Characteristics

Companies that seek to enlist the help of a venture capitalist must submit a business plan to a venture capital firm, such as the Development Bank of Canada, or alternatively to an angel investor. If approved, the latter will perform due diligence, an examination of the business in its entirety with the objective of determining an appropriate investment for a share of the equity. Upon finalizing negotiations, the firm or angel investor will be part of the executive team to guide the business to its goals.

There are also several classes of venture capital investments;

  • Start-up financing – where venture capital is invested during start-up (Research and Development or market research) at a period in which risks and returns are the highest.
  • Second-stage financing – where investment is directed towards expansion of a commercially available product.
  • Bridge financing – where the investment is expended in hopes of reaching an IPO.

Lastly, there are also variations of venture capital;

  • Private venture capital partnerships are considered to be the highest risk investments where the capital is advanced if it has a thirty percent rate of return.
  • Industrial venture capital pools are aimed towards high-tech firms with innovation ideas that have potential to create new markets.
  • Investment banking firms are usually designed to produce expansion capital by selling company shares to public and private investors.