What is Venture Capital and How does it Work?

The seed money of business

Venture capital is the name given the start up money used, generally, to start a new business enterprise. If you were to open a book store, for instance, you would need to find a business space zoned for retail sales, lease the space and fill it with bookshelves, carpeting, lighting, and of course books, in order to have them to sell. While you might be able to roll some of the leasehold improvements (lighting, carpet, HVAC) into the terms of your lease, you still need a bundle of money for shelving, cash registers, display racks for magazines and what not.

If you have a solid business plan, lots of business contacts and some personal property of your own, you might find someone who will loan you the money to set up your store. You might have to give up a good portion of the equity in the business to acquire the money, in addition to having to pay interest on the money, or you may not. Each deal is different and in some sense, everything is negotiable.

Sometimes venture capital is big money, as was being thrown around years ago when the belief that "everything" with a dot.com after it would make money, and lots of bright young people with bright ideas and writing skill wrote fascinating business plans and managed to get lots of rich guys with visions of being richer to cough up a lot of that money to get the business started. Some of them, like AOL and Yahoo, worked, and a great many others not quite so well :)

In the beginning of the summer, my 15 year old daughter borrowed ten dollars from me to buy 4 twelve packs of soda. That ten dollar bill was the venture capital for her enterprise. At the end of the weekend she had sold 48 cans of soda at one dollar per can, and was able to repay me my ten dollars, plus she had funds to replenish her inventory for the next weekend. I got a couple of free sodas, so that was my interest :)

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Research Analyst 8 years ago

Thanks, this is great information.

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