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What is venture capital?

Posted on 16 August 2018

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Venture capital is finance provided by investors to startups and small businesses that are expected to grow rapidly in the long term. It's named for the high risk it poses to investors. Why risk? Startups are innovative projects that are in a process of growth, development and evolution and whose success is not certified, so there is the possibility of losing the investment.

So why are venture capital funds betting on startups? The answer is simple: By business opportunity, these are new innovation projects that can have great potential and future profitability. A financing formula which entrepreneurs use at a stage of greater development of their project, when their product or service already has certain trajectory and its scalability begins to be projected. What exactly is a venture capital fund? How do they work? 

VC funds invest in startups in exchange for a share in their assets or capital. Generally, these funds invest in startups with a technological component or a disruptive business model, in sectors where growth above the market average is expected. The objective of these funds is to increase the value of the startup, so that after obtaining the established goals and maturity of the project, to be able to retire successfully, in an exit in which the invested capital is recovered plus the obtained benefits. 

The budget for venture capital funds comes from the combination of capital from several shareholders, so the amount of finance is much higher than usual for other investment formulas. A capital injection that allows entrepreneurs to compete with the 'big ones', boosting innovation, especially in technology, and a fair and competitive market with the success of the best ideas. In fact, VC funds are the ones that invest most in startups in Spain, where they lead 44% of investments, mainly in sectors such as e-government and Fintech.

Some of them such as Rakuten, Aleph, 360 Capital Partners, Seaya Ventures or K-Fund have already visited South Summit. In addition, finalist startups from previous editions of the meeting have led outstanding rounds of funding led by this type of funds such as Cabify, which closed last year a round of 131 million euros with the support of numerous national and foreign funds such as Rakuten, GAT Investors, Endeavor or Liil Ventures; Glovo who raised 30 million euros from funds such as Rakuten, Cathay Capital, Seaya Ventures and others, or Spotahome who this past June has raised 34 million euros in a round of funding led by Kleiner Perkins, a Silicon Valley fund.

Now it's your turn, have you already researched the best funds you could use to finance your startup?