Financial Markets: Part 2

In part 1 of this series I explained the various steps of funding for a company and left off at number two: venture capital (VC). 

2. Venture Capital: VC firms generally take on more risk in exchange for higher possible return. VC funding is popular for companies with limited history that are unable to do debt offerings. The company often has to give up a portion of the equity in the deal and in exchange receive expertise, introductions, and connections from the veterans at the VC firm. The amount that a VC firm will invest greatly varies but is usually somewhere between $500,000 and $10 million and rarely goes above $20 million. 

3. Private Placement: PP can come before or after venture capital investments and is a way for companies to sell securities to a limited number of investors. Investors usually include large banks, mutual funds, pension funds, etc. As the name suggests the capital raise is private and only announced to the public after the deal has gone through. Public companies with more resources often sell bonds to achieve the same effect but because of the smaller size of most private companies private placements are much more common.  

Just over 5,000 companies have completed private placements so far this year (Jan - May 2013) with an average amount of $7.64 million raised on each transaction. See the trends for the last five years here.

Tomorrow I will write about the capital raising step that often follows venture capital and private placement - private equity. Thanks for reading.

-JS