What is venture capital?

Venture capital is a way for young innovative companies to increase their equity capital when they start their activity. Venture capital is also commonly known as VC.

In the case of a venture capital, the creator of the company can obtain funds, without requesting a guarantee, when it is generally complicated to get a bank loan.

Essentially, venture capital allows to consolidate the financial structure of the company by increasing its equity.

Thanks to venture capital, the entrepreneur can benefit from financial assistance, support and advice for the growth of his company.

The venture capitalist is an investor who will play a major role in the development of young companies.

When do we talk about venture capital?

In concrete terms, venture capital consists of one or more investors acquiring a stake in unlisted companies, while remaining minority shareholders. By contributing financially to the company's development, these investors aim to realize a certain capital gain when they sell their shares.

We speak of venture capital because investment funds have the main risk of not finding a buyer to resell their shares in case of failure to grow the company.

The equity investment is not intended to be permanent but to be resold. The concept of venture capital is therefore closely linked to the fact that some investments are riskier than others.The requirements for fund management are very high and involve adherence to specific objectives. Furthermore, this inherently excludes certain types of companies that do not have the potential to generate returns for the fund.

While venture capital is part of a long-term vision, professional credit in 48 hours meets the need for immediacy that many entrepreneurs experience at certain key stages.

How to create a venture capital?

The creation of investment funds to make venture capital is possible after obtaining an AMF approval as well as administrative procedures.

Registration with the AMF is mandatory and the regulations and accreditations are strict.

Several people can form an investment fund. For example, banks, individuals or financing organizations.

For those who decide to set up an investment fund, the management of the funds is entirely up to the asset manager or general partner, who will be entirely responsible for decisions about which projects to commit to.

Managing financial portfolios requires a great deal of vigilance and is highly regulated.

What are the venture capital funds?

These are management companies approved by the AMF that manage the venture capital in the entity called "funds". There are :

Venture Capital Companies (VCCs),
Venture capital funds (FCPR)
Innovation mutual funds (FCPI)
Local investment funds (FIP)

Among them, we distinguish:

Business Angels are independent people, generally very specialized in a sector and who invest their equity in innovative projects. Minimum amounts are generally around 10 000€.

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National funds (public or private) that will each have one or more business sector specialties. Here, we find for example Bpifrance which is a public institution and which supports many innovations in France.

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The regional funds that depend on the Regional Participation Institutes.

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Corporate Venture funds are internal funds of large companies or industrialists, in order to finance innovation in their sector of activity, with a view to establishing strategic partnerships.

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Finally, there is micro-capital-risk, which generally involves small amounts and informal investor clubs.

Why do private equity?

Private equity is a real growth lever for young companies like startups. It allows them to inject some financial liquidity in order to finance their development projects or their recruitments.

Private equity is carried out in a logic of growth strategy for the company. It is also a way for entrepreneurs to get closer to intangible resources such as expert advice or to obtain validation from people in the business.

Opening its capital to investors allows this company to consolidate its financial structure and, if all goes well, to properly plan its operations.

Who is concerned by venture capital?

Those directly benefiting from private equity are companies in need of capital to finance their prototype development or pre-series.

These are seed companies. In this case, the capital contribution concerns the development of the new innovative product or service as well as the recruitment of people.

Existing companies requiring funds to finance the development of a new product, for example, are also concerned by private equity.

Often, but depending on the sector and use case, VCs who have already participated in a first round of financing are also on board a second time.

You may or may not be involved in venture capital depending on several criteria, which will also determine who you turn to.

What are the advantages and disadvantages of venture capital?

Benefits of venture capital

Venture capital has many advantages: it provides introductions, a certain address book as well as close monitoring of the company's development.

The investment fund will take a minority share of the company's capital, which gives the founders a certain freedom to manage their company.

Overall, it is a opportunity for the company to finance itself to set up recruitments, developments and process accelerations.

The profiles of venture capitalists are quite varied, so each company can find the one that best suits its profile.

Indeed, the more specialized the fund is in relation to the business sector, the more relevant the advice and introductions will be, as well as the possible growth of the company.

Disadvantages of Venture Capital

Participation, via venture capital, in the capital of your company means that part of the voting power at the meetings will be held by this venture capital. To learn more, read our article on dilution.

This can be a disadvantage if the venture capitalist is not specialized in your field of expertise. Indeed, if the points of view are divergent, this can lead to somewhat complicated situations, with an economic stake behind.

Working with fund managers also requires a certain investment of time in order to properly maneuver the agreement and follow-up.

What are the alternatives to venture capital?

While many companies today rely on venture capital to finance their business, there are other alternatives.

The bank loan: the bank loan is a type of professional credit granted by banking institutions to companies to support their development.

For start-ups, although the bank loan is non-dilutive, it is often quite difficult to obtain because bankers look for a guarantee. It is a long and time-consuming process that very often requires a personal capital contribution.

Self-financing: This method of financing requires a certain amount of equity invested by the entrepreneurs themselves. It can also be complicated for the entrepreneur, especially at the very beginning of a young company.
Participatory loans: This solution allows companies to strengthen their equity without giving up shares, offering an attractive hybrid alternative for growing businesses.

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