Different Types of Venture Capital
There are several different types of venture capital. These distinctions refer to the timing of the investment or its specific purpose within the life of the target company, but the need for a high return in exchange for the risk remains constant.
The different types of venture capital can be divided into three main groups. These are Early Stage, Expansion, and Acquisition/buyout. Each of the three main groups can be further divided into sub-groups based on the specific timing of the investment or its intended purpose. It should be remembered that these distinctions do not alter the basic idea of venture capital as private equity being invested in high risk/high return companies that are on the innovative cutting edge.
The Early Stage investments include seed investments. These are usually smaller amounts intended to encourage the research and provide capital during the time prior to actual start up of operations. Start up capital refers to the funds needed to actually launch operations. First Stage capital refers to funds used to sustain operations following start up, but prior to the actually production of products.
The next group of investment types is called Expansion capital. These include Second Stage and Third Stage funding. Second Stage is usually thought of as the period after production has begun, but before profitability has been reached. Third Stage is the time after profit, or even when the break even point is reached. This is the time when additional products or even research into expansion ideas can be started. Bridging capital is another type mentioned here. It has several meanings, but mostly they can be thought of as capital that “bridges” a time gap. For example, if some traditional financing is expected or funds are anticipated as a result of a pending IPO, the bridging capital is used to carry on active operations until the funding event occurs.
Acquisition/buyout capital is the final group. This type of capital is used for the acquisition of assets, including other companies that are being adsorbed into the organization. It also includes capital for the buyout of certain assets of the company. There is an association with this type of funding and the exit strategy idea of venture capital. The exit strategy idea is a hedge against possible failure of the high risk investment by having a plan to recoup investments by selling off assets.
Once again, the types of venture capital listed above are related to the actual timing and purpose of the capital. Capital investment opportunities do not only exist in the early stages of a company’s life. They are present through all stages of its growth as long as the basic requirements of high return are met. It is always understood that when less expensive and restrictive financing options are available, the company will seek them, so it is assumed venture capital needs, despite the type, will always entail risk.