Blog 9: Why Venture Capital has grown over 2000% in the last ten years? Investors Love Hate relationship with it.
Venture Capital is the investors secret money making machine. But now it’s becoming more clear for new investors to follow. The concepts of venture capital require time to perfect and they also require some money and now as sites like Start Engine or Funders Club are now live and investing in Private Equity, there has to be some way we can all do it and there is. The question then becomes how can we all afford this kind of investing. Is it really that simple and how do we get in now?
What are the types of Venture Capital(VC) that are generally used?
Venture Capital takes form in two areas and generally two main types of venture capital investing.
Most investments come from large banks, billionaires, Corporations and or individuals with high net worth portfolios.
The First type is called Angel Investing and most investing in early stages is also known as Early Investing. This is the phase at which Shares are worth the least per price of share. Price per share at this point is about 50 cents per share. Most Entrepreneurs will only seek out an investor if they see that they need one of three things:
- Cash Infusion- A Cash Infusion is for companies that need a cash infusion repeatedly, an Entrepreneur may offer up a set number of shares per dollar received. Investors love these deals because once they invest they can receive shares and once they do that they can continue funding the company for more shares till the board stops selling shares or he/she can join the board or offer up their shares at a higher or lower price to a secondary party. Ex: Robinhood taking a cash infusion after the Meme Stock rise.
- Expansion: To grow a company needs money, usually money that comes from sales has to be put back into the company to be used for things like Production, Marketing and other needs that the company has. So the Entrepreneur has only two options, downsize or sell some shares to an investor for a cash infusion which will allow the entrepreneur to buy some assets to expand. Ex: How Apple Bought Beats Music.
- Acquisition: If an Entrepreneur sees that the company needs some larger infrastructure or is not able to handle the growth rate at that level, Acquisition is one of the only options, the company may sell all of its assets to cash out its investments, and then it’s stock to an investment firm or another company. This company may buy all of it’s assets to use and expand. Ex: Amazon buying Zappos, Blink, Waymo and Whole Foods to expand or how eBay bought PayPal.
Serial Investing is the Second type of Investing and is actually the most confusing considering at this point, but is the most common. Serial investing takes very little time and is actually how most of these VC sites work.
Serial investing is when an investor and a business owner make a proposition, discuss the offer and then based on compromise the investment goes through. Most Serial Investments require some kind of legal involvement as do Angle Investment deals though Serial Investments have more legal involvements to deal with.
Serial Investments are often linked to things like Real Estate and Agricultural Ventures because they don’t require much to get off the ground unlike a startup or a company, VC firms also like to use Serial Investing for things like extra cash flow, Acquisition and to make deals more interesting and to attract more investors to them. Serial investing is also used for extra investments and repeated cash flow so basically which investors are gonna keep cash flowing.
Why have they Grown over 2000% in a decade?
VC has grown for five reasons and most of these reasons are pretty obvious but I’ll list them regardless.
- Higher Demand for Investors and Entrepreneurs since the Internet Boom- Investors were able to take advantage of the growth of Internet Companies and it sparked a growth in Investors for a long time, since the Dot Com Bubble Burst, the number of investors has stabilized and now it’s going back up.
- More companies are forming and offering up stock as a way to generate early stage cash flow: This is pretty obvious with economies of Scale and how that works. If your not familiar with Economies of Scale, it works as such. As a product gets bigger or higher in value they need money to continue expanding.
- Entrepreneurs are popping off left and right and they need capital to get started: If an entrepreneur needs to get a business off the ground and into profitability he/she needs money so investors will put small amounts of money at first to help entrepreneurs to get started. This is common in most small businesses.
- More Billionaires than any era in history and its helping others: Entrepreneurs like Mark Cuban, Bill Gates and Elon Musk invest in the people who they see have the most potential and it pays off to know that they invest in a new generation of entrepreneurs.
- Platforming: As more VC platforms become available, people become more willing and able to invest in businesses pre IPO. This is key and it takes time to get that.
There are several other reasons but for now lets close off the blog.
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