Venture capital – what is it?

DSIF venture capital
Nikola Stankovic

Nikola Stankovic

Nikola is a MSc Business Administration student at the University of Twente and 2019-2020 Brand Director at DSIF. He would like to share some of the knowledge on venture capital financing that he acquired from his courses in entrepreneurhsip and finance as well as his experience as a member of DSIF.

In the majority of cases, many early-stage startups do not have the option for self-funding. They are forced to look for financing from external sources. Due to their high-risk label, many startups often have very thin chances of obtaining finance through low-risk investing institutions such as banks. Venture capital as a rising trend in the startup and investment world might just make life for startups easier.

Finding growth capital for your startup

Starting up a company can prove to be a gruelling process. One of the bigger challenges many entrepreneurs are faced with, is finding growth capital for their startups. An entrepreneur might have worked out an amazing business plan with a disruptive solution. However, without access to financial resources, no further progress can be made to introduce the idea to the market. That is why financial resources represents one of the cornerstones of each startup on this planet. In the majority of cases, many early-stage startups do not have the option for self-funding. Hence, the entrepreneurs are forced to look for financing from external sources. Traditionally, the first places to look for money is a bank. Nevertheless, early-stage startups represent a high-risk investment and often work with negative cashflow and no collateral. As a result, their investment profile is a mismatch for banks, who are low-risk taker. So, where to go?

Introducing venture capital

One of the non-traditional financing options for entrepreneurs that is increasing in popularity is venture capital. You might ask yourself, “what is venture capital”? Simply put, venture capital is a form of equity funding that is provided to startups that show high growth potential. Venture capital funds such as DSIF are the parties that provide such capital. They manage the money of investors who seek an equity stake in high-potential startups. In our case, DSIF is a student-run venture capital fund that invests in innovative student startups. These kind of investments are generally characterized as high-risk/high-reward opportunities.

Benefits of venture capital funds

Aside from financial backing, venture capital funds can provide young startups with valuable sources of guidance and consultation. They can for example help startups in various decision making moments, financial strategy and human resources among others. Venture capital funds also give a positive signal about the future of the startup. Furthermore, they can use their network to attract follow-up investment or obtain valuable information for the startup.

So, if you have a great idea or are alredy working on your startup, know that venture capital might be an option that can help grow your startup to new heights.

Sources

US Chamber of Commerce. (2019, February 25). We Ask: What’s Your Biggest Challenge? Entrepreneurs Say: It’s Financing. Retrieved from: https://www.uschamber.com/co/run/business-financing/business-financing-challenges.

Harrison, R. T., Botelho, T., & Mason, C. M. (2016). Patient capital in entrepreneurial finance: a reassessment of the role of business angel investors. Socio-Economic Review14(4), 669-689. https://onlinelibrary.wiley.com/doi/abs/10.1002/sej.1220

De Rassenfosse, G., & Fischer, T. (2016). Venture debt financing: Determinants of the lending decision. Strategic Entrepreneurship Journal10(3), 235-256. https://academic.oup.com/ser/article-abstract/14/4/669/2656163

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