What is Venture Capital/Private Equity?

Venture capital is a means of providing long term equity funding to young fast growing companies. It is often called "direct investment" or "private equity investment". There are three main types of private equity transactions: startup venture capital, development capital and buyouts.

Companies require funds to develop their business. Financial support can take the form of loans and/or equity capital. A company not listed on a stock exchange can obtain funds from banks or by issuing shares to private investors. Venture capital companies inject funds into the company in exchange for a proportion of its equity.

Venture capital firms are prepared to assume considerably higher risk by investing at the early stages of a company's development in the hope that they can reap higher returns if the company meets or exceeds its projections.

Venture capital firms realise their returns when an investee company has built a successful track record to qualify for listing on the stock exchange. Other means of exiting from investments are management buy-backs through put options based on a pre-determined formula, private placements to interested third parties or an outright or partial trade sale.