Venture capital, for short VC, refers to equity capital that investors or venture capital firms invest in young, innovative companies with high growth potential.
In return, investors receive shares in the company. Unlike with a traditional loan, the capital does not have to be repaid on a regular basis or bear interest. In return, investors share in the company’s future success, but also bear the risk of losing their entire investment.
Venture capital is particularly suitable for start-ups that:
- develop an innovative product or a new technology
- to target a large or rapidly growing market
- pursue a scalable business model
- want to grow quickly
- require a great deal of capital for product development and market entry
- are not yet sufficiently profitable to qualify for traditional bank financing
The capital invested can, for example, be used for:
- Product and Technology Development
- Recruitment of new staff
- Development of marketing and sales
- Tapping into new markets
- technical infrastructure
- international expansion
- Acquisitions of other companies
- Extension of the financial runway
Venture capital funding can take place at various stages of a company’s development:
| Funding phase | Typical focus |
| Pre-seed | Development and validation of an early-stage business idea |
| Seed | Product development, first customers and market entry |
| Series A | Establishing scalable sales and business processes |
| Series B | strong growth, team building and market expansion |
| Series C and beyond | international expansion, new business areas or preparations for an exit |
Venture capital is provided by, amongst others:
- independent venture capital funds
- Corporate venture capital units
- publicly owned companies
- Family Offices
- institutional investors
- specialised early-stage or growth funds
As well as capital, venture capital investors often contribute other resources:
- Experience with growth and scaling
- Contacts with potential customers and partners
- Access to further investors
- Support for subsequent funding rounds
- Industry and market knowledge
- strategic brainstorming
- Experience with company disposals or initial public offerings
Before making an investment, investors usually assess the start-up as part of a due diligence process. The following factors are particularly relevant in this regard:
- The quality and experience of the founding team
- Size and growth of the target market
- Relevance of the customer’s problem
- Product-market fit, or the first signs of it
- Traction and revenue growth
- Scalability of the business model
- Competition and differentiation
- Unit Economics and Financial Planning
- Shareholding structure
- potential exit strategies
A simplified example:
| Key figure | Amount |
| Pre-money valuation | €4 million |
| VC investment | €1 million |
| Post-money valuation | €5 million |
| Proportion of new investors | 20 % |
In this example, the investors invest one million euros and receive 20 per cent of the company in return. The shares held by the existing shareholders are reduced accordingly. This effect is known as Dilutionreferred to as.
Venture capital offers start-ups a number of advantages:
- Access to larger sums of capital
- faster growth
- Waiver of fixed loan repayments
- strategic support
- Access to key networks
- greater credibility with other partners and investors
At the same time, potential challenges arise:
- Transfer of shares in a company
- Investors’ rights to have a say
- Dilution of the founders’ shares
- significant pressure to deliver growth and returns
- extensive information and reporting obligations
- differing views on strategy or exit
- increasing demands on governance and financial planning
Venture capital investors generally aim to sell their stake at a profit after several years. Possible exit strategies include:
- Sale to another company
- Sale to other investors
- Repurchase of shares
- Initial public offering
- complete sale of the business
Venture capital differs from other forms of financing:
| Venture Capital | Bank loan |
| Investors receive shares in the company. | The bank receives interest and repayments. |
| No fixed repayment of the capital invested | Regular repayments are required |
| High risk for investors | Collateral and proof of creditworthiness are often required |
| Focus on strong growth | Focus on repayment capacity |
Business angels also invest equity capital. However, they often get involved at an earlier stage, usually invest smaller amounts and act as individual private investors. Venture capital firms, on the other hand, generally manage funds and invest larger sums in accordance with a defined investment strategy.
Venture capital is not suitable for every start-up. Companies with limited growth potential, a very long-term development trajectory or a business model that cannot be scaled often do not align well with the return expectations of VC investors. Alternative forms of financing may include, for example, bootstrapping, grants, loans or strategic partnerships.
A common mistake is to focus solely on the size of the investment or the company’s valuation. Equally important are the terms of the investment, voting rights, expectations and the strategic value added by the investors.
innoWerft helps founders to assess their capital requirements and funding strategy, prepare relevant key figures and documentation, and approach suitable investors. It also supports start-ups in preparing for pitch, investment and funding meetings.