Early Stage Venture Capital Key Terms

Keep these terms in mind when working with early stage venture capital

Entrepreneurs have only a few methods of raising the necessary capital to either start or expand their young business. The most important source of significant funding for such people is early stage venture capital. Early stage venture capital refers to capital provided as seed money, so the entrepreneur can develop an idea In some cases, an entrepreneur may have a very difficult time finding anyone to back his or her idea, requiring an angel investor to provide seed capital. Since early stage venture capitalists do not specialize in later-stage companies, they often seek to exit the investment when the firm is old enough. Here are some key terms to get you acquainted with early stage venture capital.

 

Seed capital

Seed capital is the funding provided to develop an idea. At this stage, there is no business to speak of, merely an idea for a business. This is the riskiest type of financing, and so it's hardest to find. If you are at the beginning stage of a business plan and need financing to develop a prototype, then you're in the market for seed capital.
Try: Check out the article at BusinessFinance.com for a deeper understanding of seed capital.

Start-up company

A start-up company is one stage up from an idea. A prototype might exist, there may be a few customers, but the company is very small. Start-up companies require venture capital to fund expansion of the business. A start-up company has a lot of promise, but is still a very risky prospect for venture capitalists.
Try: TheFreeDictionary has an excellent definition of a start-up company.

Angel investor

An angel investor is an individual or institution with a high net worth, providing venture capital for firms that cannot otherwise get financial backing. An angel investor is a last-resort type of venture capitalist that typically takes on the riskiest investments. An angel investor may be more willing to offer seed capital.
Try: Small Business Notes has a discussion of angel investors and what they provide. It also details what angel investors expect from the companies they finance.

Exit strategy

An exit strategy is important, because no venture capital invests in a firm for a long period of time. Venture capital investments tend to be limited to a few years at the maximum. An exit strategy is how the venture capitalist plans to get the investment returns out of the company. It's important for the company to be aware of this, because the exit strategy could interfere with the entrepreneur's vision for the company.
Try: Investopedia ULC has an intuitive definition of exit strategies as applied to venture capital firms.

Pre-money valuation

In order to determine how much funding to provide, the venture capitalist may conduct or require a pre-money valuation. This is a method of determining the value of the business prio
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Carried interest

Carried interest is how most venture capital firms make their money. It is the share of the business's profits reserved for the venture capital firm. Usually it's quite high. The profits, net of carried interest, pass on to the limited partners in the venture capital firm.
Try: VC Experts defines carried interest and has several resources to help you find out more information.

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