As the highest risk form of private equity financing, venture capital (VC) provides funding for startups and emerging companies, usually in
in exchange for an ownership stake or equity in the company. Because venture capital firms finance early-stage businesses, VC investments have a
than other private equity funding. The flip side to this high-risk model is that investors receive a high stake in the company and have a notable say in how the company operates. Generally, a small number of these startups will be
upon exit. The entire point of all private equity funding is that, at some stage, investors will generate a return on investment through either an initial public offering (IPO) or merger and acquisition (M&A) deal.
Funding rounds: a constant necessity at different development stages
Venture capital financing can be attained at
various stages or funding rounds. The most common rounds include seed stage funding and series funding. Seed funding is the first official funding stage and helps startups sprout into a growing business. As seed funding is acquired at the beginning of a business journey, it often consists of financial backing not only from VC companies but also from friends, family, incubators, and most often
angel investors. Growth funding, or series funding, comes at the stage in which a company has developed into an operating business. Whereas seed funding will be used for research, product development, and putting a team together, series funding is used to scale up the operations of the business. Companies can seek several rounds of funding as they look to continue to expand products and enter new markets before eventually making an exit.
Unicorn companies, the ultimate goal of venture capitalists
For all venture capital firms, the dream is to find a unicorn company. Unicorns are privately held startups that have reached a value of over one billion U.S. dollars. Since the term was coined in 2013, Europe has produced a growing number of unicorns. The most valuable of these is currently the UK-based IT service management company
Global Switch. The
largest exit involving a European unicorn was the IPO of Spotify in 2018. There have also been several
specific European industries that are more likely to produce a unicorn.
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