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Venture Capital

Venture or risk capital describes off-market equity capital invested by an investor in high-risk projects or companies.

It mostly involves investments in young, non-listed companies with promising new products or technologies (start-ups). The industries and markets in which these companies operate are often in an early phase of development but show potential for significant growth. Venture capital firms provide not only capital, but also management expertise and networks as a means of offering support to typically inexperienced entrepreneurs and ensuring the success of their own investment. Venture capital firms are primarily sought after by young companies that are often unable to procure the necessary funds to finance their ventures themselves. Financial institutions will typically deny loans to young companies due to a lack of security. As such, venture capital represents an alternative to traditional forms of financing.

Different forms of venture capital investments exist for different phases in a company`s lifecycle, each of which is associated with risk-appropriate return expectations.

Seed financing
Very early phase in which capital is primarily used to prepare the product or service for market launch. This phase involves the greatest risk of total loss, as no viable product is yet available and no evidence of market success exists. Accordingly, return expectations are highest during the seed phase.

Early stage financing
Product development has been largely completed and the company is preparing for market entry. Capital is needed to set up production capacities, marketing and sales efforts and to gain initial market experience. This phase still harbors the risk that that product will not be successfully placed in the market.

Expansion/growth financing
The company has market-ready products and is already generating sales. Capital is needed to further expand marketing and sales structures. There are now initial indications of the product`s market success, further reducing investor risk. However, valuation typically increases, leading to lower returns.

Exits should be successfully conducted after a period of 3 - 7 years. There are several different divesture options: IPO, trade sale, secondary sale, company buy-back, or in the worst case scenario: liquidation.