Get to Know Social Venture Capital

Raising Capital as a Social Venture

Venture capital saw significant growth in 2021 and early 2022, but it did not see the same level of growth in ESG considerations as other investment areas. This presents a significant opportunity for growth in social venture capital in the coming years as investors become more interested in aligning their financial goals with their values and positively impacting society.

The industry is starting to move in this direction, with more firms and sectors focusing on social and environmental impact. Many venture capital firms are now collaborating to improve their practices and support diversity and other critical missions. Additionally, more firms are hiring directors of sustainability and other professionals to steer investments and initiatives in ESG directions.

As investors become more conscious of the impact of their investments and as more companies take steps to address environmental, social and governance (ESG) issues, it's likely that we will see more growth in social venture capital in the coming years. This will provide a growing number of investors with an opportunity to earn financial returns while also making a positive impact on society.


Social venture capital (SVC) is a type of investment that aims to generate both financial returns and positive social or environmental impact. This approach combines the principles of traditional venture capital with the goal of addressing social and environmental issues. SVC funds typically invest in companies or organizations that are working to solve pressing social or environmental problems, such as poverty, climate change, or access to healthcare. These investments can be made in a variety of sectors, including technology, renewable energy, and education. SVC is gaining popularity as it allows investors to align their financial goals with their values and make a positive impact on the world while earning a return on their investment.

The Importance of Social Venture Capital

Social venture capital is a type of investment capital that is used to finance social enterprises, which are businesses that are established with the primary goal of achieving a social or environmental impact rather than solely maximizing profits. Social venture capital is becoming increasingly important as traditional sources of funding become harder to access, particularly for early-stage businesses.

There is growing awareness of the need to address social and environmental problems, traditional sources of funding becoming less reliable, social enterprises often having a greater impact on society and the environment, as well as being more sustainable than traditional businesses. Social enterprises are motivated by a desire to make a difference rather than maximize profits.

Therefore, social venture capital is an important source of funding for businesses that are making a positive impact on society and the environment and is increasingly being seen as an attractive investment opportunity for those looking to align their financial goals with their values and make a positive impact on the world.

Social Venture Capital Role

Social Venture Capital (SVC) is a form of private equity investment that targets companies with a social or environmental goal. SVC firms invest in businesses that strive to produce both financial returns and a positive social or environmental impact. The origins of SVC can be traced back to the venture philanthropy movement in the 1970s. In the early 2000s, a new generation of SVC firms emerged, inspired by the success of socially responsible businesses like Ben & Jerry's and Toms of Maine, which proved that companies with a social or environmental purpose could be profitable and have a global impact.

SVC firms invest in a wide range of organizations, including for-profit companies, social enterprises, and hybrid organizations. They tend to focus on sectors such as education, healthcare, energy, and agriculture and invest in companies at all stages of development, from startups to established businesses.

SVC firms use various financial tools, including debt, equity, and grants, and provide mentorship, networking, and technical assistance to their portfolio companies. SVC has been successful in supporting a number of companies that have a significant impact in their sectors, such as D-Rev, a design firm that creates affordable medical technologies for low-resource settings, and One Acre Fund, which provides smallholder farmers in Africa with financing, training, and market access.

SVC is still a relatively new field and is evolving as the needs of social entrepreneurs change. As more companies enter the space and more capital flows into SVC funds, the industry will continue to grow and mature. SVC is an innovative investment model that enables investors to align their financial goals with their values and make a positive impact on the world while earning a return on their investment.

Types of Social Ventures

Types of Social Ventures
Type of Social Ventures

Social venture capital (SVC) is a type of impact investing in which financial capital is provided to social ventures with a social or environmental mission. SVC investors seek both a financial return and a positive social or environmental impact, typically through equity investment in for-profit social ventures. SVC investors typically provide patient capital, which means they are willing to accept a lower financial return in exchange for the possibility of a higher social return, and they frequently provide assistance other than financial capital, such as mentorship, access to networks, and expertise.

Numerous types of social ventures may be appropriate for SVC, but some common themes include:

Ventures that address a social or environmental problem

These problems can include issues such as poverty, climate change, lack of access to healthcare and education, inequality, and more. Social ventures work towards solving these problems by creating sustainable and scalable solutions, which can have a positive impact on communities and the environment.

Ventures with a business model that is sustainable and scalable

Sustainability and scalability are important factors for social ventures to have a lasting impact. A sustainable business model is one that generates enough revenue to cover its costs and ideally generates a surplus that can be reinvested back into the business. A scalable business model is one that can grow and expand to reach more people or have a greater impact without incurring disproportionate costs. By having a sustainable and scalable business model, the social venture can continue to grow and have a positive impact on society and the environment.

Ventures with a talented and committed team

Having a talented and committed team is crucial for the success of a social venture. Social venture capital (SVC) investors often look for a team that has the passion, skills, and commitment to make the venture successful. A team that is passionate about the social or environmental problem they are trying to solve is more likely to put in the extra effort and determination to make the venture a success. A team with the necessary skills and experience to run and grow the business can help ensure the venture is sustainable and scalable. A committed team that is willing to work hard and make sacrifices to achieve the venture's goals is important for a social venture to be successful.

Ventures with a clear plan for how to use the capital

Having a clear plan for how to use the capital is important for social ventures looking to receive funding from social venture capital (SVC) investors. SVC investors want to see that the social venture has a clear understanding of the social or environmental problem it is trying to solve and how the capital will assist it in achieving its objectives. This includes a detailed financial plan, a clear revenue model, and a projected timeline for achieving specific milestones. The plan should also demonstrate a clear understanding of the market and the venture's target customers, as well as a realistic assessment of the competition and the venture's competitive advantages. Additionally, it should show that the team has a clear vision and mission for the venture and how they plan to scale up and have a greater impact.

Ventures that are ready for investment

Social ventures typically need to have reached a certain stage of development before they are ready for social venture capital (SVC) investment. SVC investors want to see that the venture has a viable product or service, has demonstrated initial traction with customers or users, and has a clear path to profitability. Having a minimum viable product (MVP) or service is important because it shows that the venture has a working prototype or proof of concept that can be tested and validated with customers or users. Initial traction with customers or users is also important, as it demonstrates that there is a market for the product or service and that the venture is on the right track to building a sustainable business. A clear path to profitability is important for SVC investors because it shows that the venture has a viable business model that can generate enough revenue to cover its costs and generate a financial return for the investors.

SVC can be a powerful tool for driving positive social and environmental change. By providing financial capital and support to social ventures, SVC helps these ventures to scale and achieve their impact goals and provides an opportunity for investors to align their financial goals with their values and make a positive impact on the world.

Social Venture Capital Challenges

Social venture capital (SVC) is a form of private equity investment that targets companies or organizations that aim to generate financial returns and make a positive social or environmental impact. SVC was created as an alternative to the limitations of traditional philanthropy and impact investing, which often have difficulty scaling and maintaining their impact, by providing funding and expertise to social enterprises to aid in their growth and impact objectives.

However, SVC also has its own set of challenges, such as the high risk of failure for early-stage companies with untested business models, difficulty in attracting top talent as many professionals prefer working for traditional private equity or venture capital firms, and challenges in raising capital as investors may be hesitant to invest due to perceived risks.

Despite these challenges, SVC can potentially drive significant social and environmental change. With the right combination of talent, funding, and expertise, SVC firms can help social enterprises to scale and achieve their impact goals. As more investors look to align their financial goals with their values and make a positive impact, SVC is likely to become a more prominent area of investment.

Social Venture Capital Benefits

Social venture capital (SVC) is a type of impact investing that provides financing and support to early-stage and growth-stage social enterprises. These enterprises are businesses that are established with the primary goal of achieving a social or environmental impact rather than solely maximizing profits. SVC aims to generate both financial return and social impact, unlike traditional philanthropy or government aid.

SVC investors seek to invest in companies that are addressing social and environmental problems in innovative ways, providing much-needed capital to help these companies grow and scale their operations. In addition to financial support, SVC investors also offer their expertise and networks to help social enterprises succeed.

Investors in SVC focus on investing in companies that address social and environmental issues in innovative ways, providing necessary funding for these companies to expand and improve their operations. Along with financial support, SVC investors also offer their expertise and connections to help these social enterprises succeed. SVC has become more popular in recent years, with a growing number of firms and individual investors participating. This type of impact investing has the potential to change the way we solve social and environmental problems by providing sustainable and efficient solutions.

SVC offers a number of potential benefits for social enterprises, such as helping them access the capital they need to grow and scale their operations, providing valuable expertise and networks that can help social enterprises succeed, and creating more sustainable and effective solutions to social and environmental problems. By providing both financial returns and social impact, SVC offers an attractive investment opportunity for those looking to align their financial goals with their values and make a positive impact on the world.

Social Venture Capital Risks

Risks of Social Venture Capital
Risk of Social Venture Capital

There are risks associated with social venture capital (SVC) investments, just as with any investment. These risks include:

The social or environmental problem may not be solved

Social venture capital investments carry the risk that the social or environmental problem the venture is trying to solve may not be solved. There are several reasons why this may happen:

  • The problem is too big or complex to be solved by the enterprise alone: Some social or environmental problems are so big and complex that they require a coordinated effort from multiple stakeholders. If a social venture is not able to secure the necessary partnerships and collaborations, it may not be able to have a meaningful impact on the problem.
  • The enterprise's solution is not effective: Even if a social venture has a good understanding of the problem it's trying to solve, its solution may not be effective in addressing the problem. This could be due to a lack of understanding of the target market, a lack of user engagement, or a lack of scalability.
  • The enterprise is not able to scale its solution to reach a large enough number of people or businesses: Even if a social venture has a good solution, it may not be able to reach a large enough number of people or businesses to have a meaningful impact. This could be due to a lack of funding, a lack of partnerships, or a lack of regulatory support.

The enterprise may not be profitable

This could happen for a number of reasons:

  • The enterprise is not able to generate enough revenue to cover its costs: Social ventures often have a social or environmental mission that is at odds with maximizing profit. This can make it difficult for the enterprise to generate enough revenue to cover its costs, especially in the early stages of development.
  • The enterprise is not able to scale its operations efficiently: Scaling a social venture can be challenging, as the enterprise may not have the necessary resources or infrastructure to expand its operations. This can lead to increased costs and a lack of profitability.
  • The enterprise encounters unexpected costs: Social ventures often operate in new or untested markets and may encounter unexpected costs, such as regulatory compliance costs, that can impact profitability.

The enterprise may not be able to attract further investment

This could happen for a number of reasons:

  • The enterprise fails to meet milestones or targets set by investors: Social venture capital investors often provide funding in exchange for specific milestones or targets to be met by the enterprise. If the enterprise fails to meet these milestones or targets, it may be difficult to attract further investment.
  • The enterprise encounters difficulties scaling its operations: Scaling a social venture can be challenging. If the enterprise encounters difficulties in this process, it may be viewed as a higher-risk investment by potential investors.
  • The enterprise faces negative publicity: Negative publicity can hurt an enterprise's reputation and make it more difficult to attract further investment. Negative publicity can come in many forms, such as negative media coverage, legal issues, or regulatory issues.

The social or environmental problem may worsen

This could happen for a number of reasons:

  • The enterprise's solution is ineffective and makes the problem worse: Even if a social venture has a good understanding of the problem it's trying to solve, its solution may not be effective in addressing the problem and could make it worse. This could be due to a lack of understanding of the target market, a lack of user engagement, or a lack of scalability.
  • The enterprise's solution has negative unintended consequences: Even if a social venture's solution effectively addresses the problem, it may have negative unintended consequences. This could be due to a lack of understanding of the broader social or environmental context or a lack of consideration of the potential impacts of the solution on different stakeholders.

The enterprise may not be sustainable in the long-term

This could happen for a number of reasons:

  • The enterprise's business model is not sustainable: A social venture may have a good solution to a social or environmental problem, but its business model may not be sustainable in the long term. This could be due to a lack of revenue streams, a lack of scalability, or a lack of profitability.
  • The enterprise is too reliant on external funding: Social ventures often rely on external funding, such as grants or social venture capital, to cover their costs. If the enterprise is not able to attract further funding or generate enough revenue to cover its costs, it may not be sustainable in the long term.
  • The enterprise is not able to adapt to changing market conditions: Social ventures often operate in new or untested markets, and the market conditions may change over time. If the enterprise is not able to adapt to these changes, it may not be sustainable in the long term.

Investors need to conduct thorough due diligence and have a clear understanding of these risks before making an investment in SVC. This can include assessing the effectiveness of the enterprise's solution, the scalability and sustainability of the enterprise's operations, and the enterprise's ability to attract further investment. Additionally, it's important to consider the long-term sustainability of the enterprise and the potential for negative unintended consequences.


Social venture capital is a form of impact investing that provides financial capital to social ventures with a social or environmental mission. It can provide significant benefits to both investors and social ventures, such as generating financial returns and positive social or environmental impact. However, it also carries a number of risks that should be taken into consideration.

It is critical to understand social venture capital and to educate investors and social ventures on its potential benefits and risks. People and organizations will be able to understand the concept and opportunities of social venture capital if more people and organizations are introduced to them. It may also help to increase the flow of capital to social ventures, which may result in more long-lasting and scalable solutions to societal and environmental issues. As a result, social ventures will be able to grow and develop in the future. It can also aid in the development of the social venture capital ecosystem.


Social Venture Capital

Social Venture Capital Impact

New Approach to Social Venture Capital

More About Social Venture Capital

Venture Capital Categorization- Angel Investing
- Seed Stage Financing
- Early Stage Financing
- Later Stage Financing
- Mezzanine Stage Financing
Venture Capital Categorization

Venture capital is a type of financing for startup companies that have the potential to grow. In order to grow, companies require a certain amount of investment. Venture capital firms acquire equity or ownership shares of the business in return of the investment.

When businesses are starting from scratch, they typically have limited or no funding at all. This is when investors come in and lend money to emerging startup businesses that have the potential for long-term growth. Entrepreneurs with little or no operating history can now obtain capital to launch their businesses thanks to venture capitalists and investors. Venture capital investments are considered high-risk investments, but they also have the potential for a high return. Investors take the risk of investing in venture capital in exchange for an equity stake with potentially large returns if the businesses succeed.

Venture capitalists and other investors take into account:

  • The potential growth
  • The strength of the management group
  • The innovation of the products or services

It is undeniable that a startup may suffer a loss; venture capital firms can typically absorb several losses; however, this must be accompanied by investment in a runway success to continue generating returns for investors.

5 Stages of Venture Capital

Venture capital has five main stages, plus two transitions that take place before and after Venture Capital funding.

Stages of Venture capital- Pre-Seed
- Seed
-Series A
-Series B
- Series C and Beyond
- Mezzanine
- Exit
Stages of Venture Capital

The Pre-Seed Stage

The stage before obtaining venture capital funding is known as pre-seed or bootstrapping. The pre-seed stage is when the company is formed and a product or service prototype is evaluated to determine the concept's marketability. At this stage, it is not possible to apply for funding to venture capital in exchange for equity. Therefore, the funding will rely on personal resources and contacts to establish the business.

Many business owners seek advice from founders who have gone through similar situations during the pre-seed stage. A successful business typically starts with an established business model and strategy guided by the founders. A partnership agreement, copyrights, or any other legal matter that is essential to the success of the businesses should be worked out at this time. These problems may become insurmountable in the future, causing investors to withdraw their investment from a business with unresolved legal issues.

At this stage, the most common investors are:

  • Startup founder
  • Friends and family
  • Early-stage investors (Micro VCs)

The Seed Stage

Now that the businesses have some experience, the business can show that it has the potential to grow and flourish. To convince venture capital that the idea has a workable investment opportunity, a presentation must be created to pitch the idea to investors. The majority of the modest funds that are raised during the seed stage are used for particular tasks like:

The target is to raise enough capital to demonstrate to future investors that the businesses have the capacity to grow and scale.

In order to help you establish credibility, seed-stage venture capitalists frequently participate in pitching concurrently with other investment rounds. A representative from the venture capital firm will most likely join the board to oversee operations and ensure everything goes as planned.

This is the most expensive stage of funding in terms of equity that a company must give up to secure investment because venture capitalists are taking a high risk.

At this stage, the most common investors are:

The Series A Stage

The initial round of venture capital financing is commonly referred to as Series A. Businesses have typically finished their business plan by this point and have a pitch deck focusing on product-market fit. Businesses are improving their products, growing their clientele, increasing their marketing and advertising, and demonstrating a consistent stream of income.

Next things to do:

  • Perfecting the product and/or service.
  • Increase the workforce.
  • Conduct any additional research that is required to support the launch.
  • Raise the funds required to carry out the plan and attract new investors.

A great strategy will be required to produce long-term profits in the Series A round. You must clearly show how you intend to sustainably monetize your product, regardless of how many enthusiastic users you have.

Angel investors and traditional venture capital firms provide the majority of the Series A funding. However, corporate venture capital funds and family offices are funding options in your industry. In order to lessen the risk of a failed investment, most investors are drawn to startups with strong business plans and executives who have the skills to implement them.

At this stage, the most common investors are:

The Series B Stage

At this stage, the businesses are prepared to grow. The operations for actual product manufacturing, marketing, and sales are supported by venture capital at this stage. This stage will require a larger capital than the previous stage in order to expand. Series B funding is distinct from Series A funding. Investors in Series B want to see actual performance as well as proof of a minimum viable product (MVP) or service in order to support future fundraising, as opposed to Series A investors who will assess your potential. Investors are reassured by performance metrics that you and your team can succeed on a larger scale.

Series B funding is typically provided by venture capitalists, corporate venture capitalists, and family offices that specialize in financing well-established startups. They provide the capital required to expand markets and form operational teams such as marketing, sales, and customer service. Series B funding can be used to:

  • Grow operations
  • Meet customer demands
  • Expand new markets
  • Compete more effectively

At this stage, the most common investors are:

  • Venture capitalists
  • Corporate venture capital funds
  • Family offices
  • Late-stage venture capitalists

The Expansion Stage (Series C and Beyond)

The Series C funding stage is typically reached after a company has achieved a certain level of success and is looking to continue growing through additional funding. This funding can be used to develop new products, expand into new markets, and potentially acquire other startups. On a fast trajectory, it usually takes 2-3 years to get to this stage and companies at this stage are typically generating exponential growth and consistent profitability.

Companies must have a solid customer base, a steady revenue stream, a track record of growth, and a desire to expand globally in order to qualify for Series C funding.

Investors are typically more willing to invest at the Series C stage and beyond because the company has achieved a certain level of success and proven its viability as a business. This reduced the risk and makes the investment more attractive to investors, who may be more hesitant to invest in earlier stages where the risk is higher.

Investors at this stage may include hedge funds, investment banks, private equity firms, and other non-traditional venture capital firms, in addition to traditional venture capital firms. These investors may see the potential for a good return on their investment due to the company's proven track record and continued growth potential.

At this stage, the most common investors are:

  • Late-stage venture capitalists
  • Private equity firms
  • Hedge funds
  • Banks
  • Corporate venture capital funds
  • Family offices
5 Stages of Venture Capital Financing

The Mezzanine Stage

The last phase of venture capital, also known as the mezzanine stage or pre-public stage, marks the transition of a company to a liquidity event, such as an initial public offering (IPO) or acquisition. At this stage, the company is considered a mature, viable business and requires funding to support significant events.

When a company reaches the mezzanine level, it is regarded as fully operational and profitable. Many of the original investors who have supported the company reach this point may decide to sell their shares and recoup a sizeable profit from their initial investment.

This opens the door for late-stage investors to come in and potentially gain from an initial public offering (IPO) or sale. The mezzanine stage is often referred to as the bridge stage because it bridges the gap between the company's earlier stages of growth and its eventual exit.

The Initial Public Offering (IPO)

An initial public offering (IPO) is a way for a private company to be publicly traded by offering its corporate shares on the open market. This can be an effective way for a growing startup or a long-established company to generate funds and reward earlier investors, including the founders and team.

To go public, a company needs to form an external public offering team of underwriters, lawyers, certified public accountants, and SEC experts; compile all of its financial performance information and project future operations; have a third party audit its financial statements and provide an opinion on the market value of the initial public offering; and file a prospectus with the SEC and determine a specific date for going public.

Going public can be a complex process that requires careful planning and attention to detail. It is important for companies to work with experienced professionals to ensure that all necessary steps are followed and the process goes smoothly.

Going public, or conducting an initial public offering (IPO), can bring a number of benefits to a company. One of the main benefits is the ability to raise significant capital through the sale of shares to the public. This capital can be used to fund expansion, pay off debts or investors, and provide additional resources for the company.

Going public can also make it easier for a company to engage in mergers and acquisitions, as it can use its publicly traded shares as currency to acquire other companies. Additionally, public stock can be an attractive form of executive compensation and employee benefit, as it provides employees with an ownership stake in the company.

However, it is important to note that going public is not the only option for a company looking to raise capital. Special Purpose Acquisition Companies (SPACs) are another option that allows a company to remain private while raising capital through the sale of shares. SPACs may offer more price certainty and provide a clearer idea of who the investors will be, which can be useful for companies weighing the value of short-term investors who are looking for a return versus long-term investors who are supporting the growth over time.

Venture capital (VC) is an important source of funding for startups, as it provides the capital needed to grow and scale the business. Venture Capitals are typically willing to invest in early-stage companies with high growth potential and are looking for a return on their investment through the company's future success.

To attract Venture Capital investment, startups need to have a solid business plan and a clear vision for the future. Venture Capital will also be looking for a team with the necessary skills and experience to execute the plan, as well as a product or service that addresses a real need in the market.

In addition, Venture Capital will be looking for startups that have a competitive advantage, whether it's through a unique technology, a strong customer base, or a patented product. It's also important for startups to have a clear plan for how they will generate revenue and achieve profitability.

Finally, Venture Capital will be looking for a strong management team that has the ability to adapt to changing market conditions and make strategic decisions that drive the company's growth.


The five stages of venture capital represent the progression of a company from its earliest stages of development through to later stages of growth and expansion. These stages provide a framework for understanding how a company can secure the funding it needs to develop and grow its business.

At the pre-seed and seed stages, companies are focused on developing a proof of concept or a prototype, building a team, and establishing a customer base. Early-stage funding is used to help a company grow and scale its business, and expansion-stage funding is used to accelerate growth and expand into new markets. Later-stage funding is used to maintain growth and prepare for an exit, such as through an IPO or acquisition.

Overall, the five stages of venture capital represent the journey that a company takes as it moves from an idea or prototype to a fully-fledged business. By securing funding at each stage, a company can gain the resources and support it needs to develop and grow its business, and ultimately achieve success.


Five Stages of Capital Funding

Venture Capital Financing

Explanation of Five Stages of Venture Capital

More About Stages of Venture Capital

Private equity and venture capital are similar in that they are both types of equity financing where firms invest in companies and exit by selling their investments in equity financing, such as through Initial Public Offerings (IPOs). However, there are significant differences in the types of companies they invest in, the amount of money they commit, and the percentage of equity they claim. Private equity firms typically invest in established companies with larger sums of money and take controlling stakes, while venture capital firms typically invest in early-stage high-growth companies with smaller sums of money and take minority stakes.

Private Equity vs Venture Capital

Private Equity

Private equity is a form of investment capital that is provided by high-net-worth individuals and firms to private companies, or public companies that are taken private and delisted from public stock exchanges. The investors in private equity buy shares or gain control of the company with the goal of growing the company and ultimately removing them from stock exchanges and making them private. Private equity firms often provide not only capital, but also strategic and operational expertise to the companies they invest in.

Large institutional investors such as pension funds, endowments, insurance companies, and sovereign wealth funds are among the major players in the private equity industry. They invest large sums of money into private equity funds, which are managed by private equity firms. These firms then use the capital from these institutional investors to acquire stakes in private companies or control of public companies with the goal of growing the companies and plan to take the company private and delist it from the stock exchanges. Additionally, there are also large private equity firms funded by a group of accredited investors, which are wealthy individuals or institutions that meet certain financial and investment criteria set by the government. These accredited investors also participate in private equity investments through these large private equity firms.

Private equity firms often target companies that are under performing or facing financial stress and poor management. The goal is to acquire these companies, restructure their debt, and make improvements to the company's operations and management. Private equity firms have the resources and expertise to make significant changes to a company and turn it around. This can include consolidating operations, streamlining the business, and cutting costs. Private equity firm's long-term investment horizon and capital resources enable them to make these big changes that may not be possible for publicly traded companies that are subject to the pressures of meeting quarterly earnings expectations.

Venture Capital

Venture capital is a form of financing that is provided to startup companies and small businesses that have the potential for significant growth and high returns, particularly those that are innovative or are creating new market opportunities. It is typically provided by wealthy individuals, investment banks, and specialized venture capital funds. The funding can be in the form of financial capital, but it can also include technical or managerial expertise. The investors are taking on a higher level of risk compared to traditional investments. If the company does perform well, the potential for above-average returns exists. The trade-off is that there is a risk of losing the invested capital if the company does not meet its potential. Venture capital funding is a popular option for newer companies or those with a short operating history, as it can provide the necessary capital to grow and expand, especially if they do not have access to other forms of funding such as capital markets or bank loans. However, the downside for the company is that the venture capital investors will often obtain equity in the company, giving them a voice in company decisions and a risk if the company may not deliver on its potential.

Venture capitalists offer more than just financial funding for new companies. They can provide valuable resources and connections for startups. They have valuable experience gained from participating in board meetings for their investments, which can become a valuable resource for companies to lean on. Additionally, venture capitalists can become a driving force for sales and fundraising campaigns, as they have a vested interest in the success of the investment. They also have powerful connections to senior professionals with specialist skills, which can assist startups in launching and expanding their business operations and access the expertise they need to grow and succeed.

The Similarities: Private Equity vs Venture Capital

Private equity (PE) and venture capital (VC) firms have some similarities in their operations. They both gather funds from accredited investors who are known as limited partners (LPs), and they both invest in privately-owned companies. The main objective of both PE and VC firms is to enhance the value of the businesses they invest in, and they do so with the goal of selling them or their equity stake (ownership) in them for a return on investment. Additionally, both PE and VC firms typically provide more than just capital to their portfolio companies, they also provide strategic and operational support to help the companies grow and succeed.

The Differences: Private Equity vs Venture Capital

The difference between private equity vs venture capital / private equity and venture capital
The Difference Between Private Equity and Venture Capital

Company Types

Private equity firms typically focus on investing in mature, established companies that have a proven track record and generate steady cash flow or may be underperforming and work to improve their operations and financial performance. They often acquire these companies through leveraged buyouts, which involve borrowing a significant amount of money to purchase the company, and then using the company's assets and cash flow to pay off the debt. Private equity firms typically invest in a wide range of industries, including healthcare, construction, transportation, energy, and many others.

Venture capital firms, on the other hand, focus on investing in early-stage companies that have high growth potential, but also high risk. These companies are often in the technology or innovation sectors, such as biotechnology, software, and cleantech. Venture capital firms typically provide funding for research and development, product development, and marketing, and they may also provide strategic and operational support. The goal of venture capital investments is to generate high returns through equity appreciation, as these companies grow and eventually go public or get acquired.


Private equity firms tend to focus on buying established, mature companies that are facing operational or financial challenges, with the goal of improving the company's performance and increasing its value. Private equity firms often use leverage, such as debt financing, to acquire companies, and then use the company's assets and cash flow to pay off the debt.

On the other hand, venture capital firms typically invest in early-stage companies that have high growth potential but are not yet profitable. They provide funding for research and development, product development, and marketing, and also provide strategic and operational support. The goal of venture capital firms is to achieve a high return on investment by investing in companies that have the potential to become successful and profitable in the future.

Deal Size

According to PitchBook, a data provider of private market deals, around 25% of private equity deals in the US are between $25 million and $100 million. Private equity firms typically invest large sums of money in companies, often in the hundreds of millions or even billions of dollars in a single company because they are investing in already established companies. This allows them to make significant changes to the company and improve its value.

Venture capital deals, on the other hand, tend to be smaller in size, with many being less than $10 million in Series A rounds. However, subsequent funding rounds, such as Series B or Series C, can be much larger. This is because venture capital firms typically invest in early-stage companies that have not yet reached profitability, and therefore require smaller amounts of funding to get started. Furthermore, they are investing in startups with a high degree of uncertainty, they prefer to spread their risk by investing in multiple companies.

It is worth noting that there are some anomalies and exceptions to these general trends, and some private equity deals can be smaller and some venture capital deals can be larger. Additionally, the size of the deal does not always correlate with the success of the company or the returns of the investor.

Percentage Acquire

Private equity firms typically acquire 100% ownership of the companies they invest in and have complete control over the operations and decision-making of the company. This allows them to implement changes and improvements to increase the company's value.

On the other hand, venture capitalists typically take minority stakes in companies, often in the form of equity, usually less than 50%, which allows them to spread their risk and invest in multiple companies and they do not exert control over the management or direction of the company. Instead, they provide funding, strategic guidance, and resources to help the company grow. They often work closely with the company's management team, but they do not assume operational control. Venture capitalists usually invest in early-stage companies that have not yet reached profitability, and therefore, they will typically split shares with founders, angel investors and other venture capitalists or private partners involved in the startup.


Private equity firms typically invest in more mature companies that have already established a track record of profitability. They tend to make fewer investments and at a larger scale, investing significant amounts of capital in each acquisition. This means that each investment is more expensive and carries a higher risk. If one of these companies fails, it can have a significant impact on the overall performance of the fund. This is why private equity firms are more selective in their investments, focusing on companies that have a low probability of failure.

On the other hand, venture capitalists typically invest in early-stage companies that are not yet profitable, and they expect that the majority of companies they back will eventually fail. However, they invest small amounts in many companies, with the hope that at least one will be a hit and generate a high return on investment (ROI). This allows them to spread the risk and mitigate the impact of any failures.


Private equity firms often fund their acquisitions with a combination of cash and debt. They will usually take out loans to finance the purchase of a company, and then use the cash flow generated by the acquired company to pay off the debt over time. This allows them to invest in more expensive and larger scale acquisitions, while spreading the risk over a longer period of time. However, this also means that private equity firms are more heavily leveraged than venture capitalists, and they are exposed to more risk if the companies they acquire do not perform well.

On the other hand, venture capital funds are typically composed of cash from investors, which is then used to invest in startups and early-stage companies. The goal is to generate a high return on investment (ROI) through equity appreciation as the companies grow and eventually go public or get acquired.

Value Returns

Both private equity and venture capital aim for a return on investment of around 20% in the form of an internal rate of return (IRR). However, it is important to note that the returns generated by these two types of investment strategies can be quite different. Venture capital returns are heavily dependent on the success of the top companies in their portfolio, while private equity firms can generate returns from a variety of companies, some of which may not be as well-known.

Private equity firms, returns are more likely to come from improving the financial performance of the companies they acquire, rather than from financial engineering techniques like leverage. In other words, private equity firms are increasingly focused on growing the companies they invest in, rather than just cutting costs and increasing debt. This shift in focus is driven by the fact that firms are using more of their own money to make acquisitions, which puts more pressure on them to generate strong returns through operational improvements.


Private equity firms have traditionally been known for their "strip and flip" approach, where they would acquire companies, dismantle and restructure them, and then sell them for a profit. However, this approach has evolved over time, with private equity firms now focusing more on enhancing and expanding the companies they acquire to make them more valuable when they are sold.

On the other hand, venture capitalists tend to be more closely involved with the companies they invest in, and often provide not only financial support but also strategic and operational guidance. The level of involvement by venture capitalists depends on the preferences of the business owner.


The work at private equity firms is similar to that of investment banking, which typically involves performing company valuations, analyzing financial statements, and coordinating with lawyers, bankers, and accountants. In this sense, private equity work is more focused on the financial and quantitative aspects of the business.

On the other hand, venture capital is often considered a more relationship-driven process, which means that venture capitalists spend more time building relationships with potential and existing portfolio companies, and less time on financial analysis. This can include activities such as making phone calls, attending networking events, and evaluating business plans. Some people may find the relationship-driven aspect of venture capital more enjoyable compared to the financial analysis required in private equity, while others may prefer the opposite.


The median salary for private equity and venture capital associates is around $150,000, with variable bonuses. However, this is not the only factor to consider when evaluating the potential for big returns. While private equity tends to have a higher potential for returns, it is also a more competitive field, with a longer and more rigorous hiring process. On the other hand, venture capital is considered riskier, as the returns are heavily dependent on the success of the top companies in the portfolio. However, the potential for outsized returns exists, as a small investment in a company could turn into significant wealth. It's worth noting that this is not a common occurrence, and not every venture capitalist will achieve these types of returns.


The atmosphere in venture capital firms is often considered more relaxed compared to private equity firms. This is partly due to the diversity of backgrounds found in venture capital, with many people coming from technology and other non-finance backgrounds. In contrast, private equity tends to attract individuals with a pure finance background, and the work culture can be more formal and hierarchical.

In terms of work schedule, venture capital firms tend to operate within a normal workweek schedule, while private equity firms may demand long, unsociable hours and little time away from work. This can be challenging for some people, as it can require a significant amount of time and dedication.

Additionally, private equity firms often involve a power struggle as there is a significant amount of money at stake. The competitive work culture can be intense and even hostile at times, as individuals are determined to succeed and make it to the top.


When you've grown tired of the fast-paced and financially focused nature of private equity or venture capital, there are various other paths you can take.

The options provided are ways for private equity professionals to transition into different roles or industries. Moving into hedge funds allows for the potential to generate a higher return on investment in a shorter time frame. Switching to venture capital offers the opportunity to be involved in the early stages of promising start-ups, despite the higher risk. Joining a corporate company can take the form of taking on a leadership role or advisory position within a portfolio company.

The options provided are ways for venture capitalists to exit their investment in a company and generate a return on their investment. An Initial Public Offering (IPO) is when a private company offers shares of stock to the public for the first time, allowing venture capitalists to sell their shares to underwriters and investors. A merger or acquisition (M&A) is when two companies combine their resources and operations, and it also provides an opportunity for venture capitalists to earn returns from the acquiring company. A share buyback occurs when a company repurchases its own shares from shareholders, which can be a feasible exit route for venture capitalists in larger companies.

Working Together

The work of private equity and venture capital/
How Private Equity and Venture Capital Work Together

Private equity (PE) and venture capital (VC) firms can work together in various ways, as capital flows through the private markets. One way they can work together is by participating in financial transactions, where capital is transferred from one entity to another. During these transactions, professionals such as investment bankers and lawyers provide advice or execute the deal, which then initiates a growth or transition phase for the companies involved. Another way PE and VC can work together is through co-investment, where a PE firm and a VC firm invest in the same company together, providing more capital and expertise to help the company grow.

Conclusion: Private equity vs Venture Capital

Private equity firms typically invest in established companies that are in need of growth capital, restructuring, or a change of ownership. These firms typically invest larger sums of money, often in the hundreds of millions of dollars, and often take controlling stakes in the companies they invest in. They also have a longer-term investment horizon, holding their investments for several years before exiting through a sale or initial public offering (IPO).

Venture capital firms, on the other hand, typically invest in early-stage companies with high growth potential. They invest smaller sums of money, often in the millions of dollars, and take minority stakes in the companies they invest in. They also have a shorter-term investment horizon, often exiting their investments within a few years through a sale or initial public offering (IPO).

In summary, Private equity firms invest in established companies and have a longer-term investment horizon while Venture Capital firms invest in early-stage companies with high growth potential and have a shorter-term investment horizon.


Definition: Private Equity vs Venture Capital

How it works?

The Differences

More about Private Equity vs Venture Capital

Updated: 17/1/2023

Venture capital can be considered as a subset of private equity and a form of financing that primarily provides funds and financing from investors to start-up companies and small businesses that are believed that have high long-term growth potential.

These companies at early stages and emerging ones that have been deemed to have high growth potential or have demonstrated high growth are the ones that have access to a pool of funds and investors. Understanding how Venture Capital works can significantly benefit you, whether or not you are an entrepreneur or not.

What is Venture Capital?

Venture capital is a type of private equity financing provided by venture capital firms or funds to startups, early-stage, and emerging companies with high growth potential. The investors, known as venture capitalists, provide capital in exchange for equity ownership in the companies they invest in. The goal is to achieve a significant return on investment through the successful growth and eventual exit of the company, typically through an acquisition or initial public offering.

How is “High Growth Potential” Quantified in Venture Capital?

This high growth is measured by a myriad of performance indicators which include the number of employees, man force of the company, annual revenue as well as the businesses' general scope of operations.

Some of the more common growth metrics that investors use to measure potential include revenue, customer acquisition cost (CAC), customer retention rate (CRR) and operational efficiency.


In the business world where cash is king, if a business is not profitable then the business is considered not viable. As a metric, revenue is simple, measured by the total sales within a given time frame. This varies from business to business e.g. if the product is a subscription-based service, this number is more meaningful if calculated monthly or perhaps a seasonal business would have profits skewed within certain time periods.

Customer Acquisition Cost

Customer acquisition cost (CAC) measures the costs to the business of bringing in new customers and is calculated by taking total sales for a particular time period take away marketing expenses. To ascribe meaning to this number this needs to be cross-referenced with Customer Lifetime Value (LTV) which explains how much revenue the business is bringing in over the time they remain a customer.

The monitoring and retaining of customers is essential for the longevity of the business given that it costs substantially more to attract new customers than to just resell to or maintain an existing customer base.

Operational efficiency measures the ratio between selling, general and administrative expenses and the business’ sales figures and is important as it points out whether or not the costs of running the business are comfortably on par with the revenue being brought in. Related financial ratios may be used here including the gross profit margins, liquidity margins as well as burn rate.

How Venture Capital industry works

Are Ratios Reliable?

From an investors point of view, the primary purpose of using these growth ratios is to not only see and measure how the company is performing but also to pinpoint which companies are being undervalued.

For example, how venture capital works is that a company with high earnings per share is considered more profitable, likely leading investors to pay more for the company whilst consistent increases in return on equity ratio indicates that the company has been steadily and consistently increasing in value and successfully translating that value increases into profits for investors.

What’s In It For the Investor?

Venture capital firms or funds invest in these early high growth stage companies in exchange for equity or an ownership stake and they are willing to take on the risk of financing risky start-ups in the hope that some of the firms they support will become successful.

But because start-ups face high uncertainty, VC investments typically have high rates of failure. Despite this riskiness, the potential for above-average returns is an incentive and an attractive payoff for potential investors.

Within the last decades, for new companies or ventures that have had a short and limited operating history, how venture capital works is that venture capital funding is increasingly becoming a popular and even expected and essential source for raising capital, especially because a challenge of emerging companies is primarily the lack of access to capital markets, traditional lending institutions such as bank loans and other debt instruments.

It has evolved from a niche activity that has its inception post World War II during an economic and financial boom into a sophisticated industry with multiple players that play an important role in spurring innovation, entrepreneurship as well as shaping the future of the financial landscape and methods of capital raising.

For more information on Angel Investors, please click here.

The Four Stages of Funding

Venture Capital funding stages

Seed Funding: What is it and How Does It Work?

How venture capital works is that the typical venture capital investments occur after an initial seed funding round. Seed funding, also known as seed money and seed capital, represents a form of securities offering in which an investor invests capital in a start-up company in exchange for an equity stake or convertible note stake within the company.

Much of the seed capital that is raised by the company typically arises from sources close to its founders including family, friends and other acquaintances but can also include seed venture capital funds, angel funding as well as more recently with the rise of social media, crowdfunding.

How venture capital works is that obtaining seed funding is the first four of the funding stages that are required for a start-up to become an established business.

Why Pursue Seed Funding?

Usually, how venture capital works is that seed funding goes towards a beginning to develop an idea for a business or new product and generally only covers the costs of creating a proposal but can also go towards paying for preliminary operations such as market research and product development. Investors can be founders themselves, pursuing with their savings and/or loans.

How is Seed Capital different from Venture Capital?

Seed capital is distinguished from venture capital in a way that venture capital investments tend to come from institutional investors and it significantly involves more money and is at arm’s length transactions.

Venture capital contracts also generally involve much more complexity in their contracts as well as the corporate structure accompanying the investment.

Besides, how venture capital works is that seed funding also involves an even higher rate of risk in comparison to a venture capital investment since the investor will be unable to view or evaluate any existing projects for funding, which is the reason why the investments made during the seed stage are generally lower but for similar levels of stake within the company.

For more information on seed funding, please click here.

What is the Goal of a Company Seeking Seed Funding?

The primary goal at this point for the company is to attract further financing. Professional angel investors sometimes provide seed money either through a loan or in return for equity in the future company. How venture capital works is that it allows for flexibility of funding, be it seed or angel.

Who Are The Typical Seed and Angel Investors?

The primary goal at this point for the company is to attract further financing. Professional angel investors sometimes provide seed money either through a loan or in return for equity in the future company.

Series A Funding

Following early stages in seed financing, the company would look for expansion funding which would help smaller-scale companies expand significantly in terms of growth. This is known as Series A funding which is when the company (usually still in the pre-revenue stage) will open itself up to further investments.

Series A is much more significant that the funding procured through angel investors, with funds of more than $10 million being procured. This occurs after the business has developed a track record (an established user base, consistent revenue figures or some other key performance indicators). Opportunities may then be taken to scale the product across different markets.

What is Required to Achieve Series A funding?

Within this round of funding, it is essential to have a plan for developing a business model that will guarantee long term profit. The business will publicise itself as being open to Series A investors and will also need to provide an appropriate valuation.

Within Series A funding, investors are not just looking for great business ideas but rather they are looking for strong strategies for turning that businesses' core idea into a successful, profitable and money-making business. At this stage, it is common for investors to take part in a somewhat more political process.

With a significant departure from the participative mentality take on by the time the company reaches series A funding, it is common for a few venture capital firms to lead the pack and a single investor will typically serve as the anchor.

Series B Funding

Following Series A funding comes series B funding and at this stage, the company has already been developed through Series A but now needs to expand further.

A company that is attempting to acquire Series B funding will have already proven itself at the market with high active users and user activity but will need to establish itself to truly begin growing revenue. Hence why Series B funding is centred around the goal of taking the businesses to the next level, past the development stage. Investors help start-ups get thereby expanding market reach.

What is the Aim of Series B funding?

Considering that companies that have gone through seed and already have substantial user bases have already proven their worth, Series B funding is primarily used to grow the company so that it can meet the increasing levels of demand. Series B is similar to Series A in terms of key players in that it is often led by the same investors as Series A. The difference with Series B is the addition of a new wave of other venture capital firms that also specialise in alter stage investing.

Series C Funding

Companies that make it to Series C funding sessions are already acknowledged to be fairly successful and is reserved for businesses that are interesting in upscaling and businesses that are interested in expanding into new markets.

It is sought by companies that have already become successful and are looking toward expanding this success through methods such as the development of new products, expansion into new markets or even the acquisition of other companies.

What is Series C Funding used for?

Beyond this, Series C funding may also be sought after by companies that are experiencing short term challenges that need to be addressed.

Within Series C rounds, investors inject capital into the meat of successful businesses to receive a significant return on their investment and the funding in this stage is generally focused upon scaling the company in a way to ensure the growth of the company be as quick and successful as possible. Series C is significantly different compared to A and B because of the mechanisms involved in scaling a business.

For example, a possible way to scaling a company would be an acquisition. Merger and acquisitions are significantly more complicated processes and indicate a shift in the direction of the business away from the start-up stage and mindset. Similarly, as the operation gets increasingly less risky, the company is also capable of attracting bigger investors.

Groups such as hedge funds, investment banks in addition to private equity firms and large secondary market groups that come into play as the business is looking more and more profitable as the company has already proven itself to be a successful business model. These new investors approach the business expecting to invest significant sums of money into these companies that are already thriving as a means of helping to secure their own position as business leaders within the market.

Therefore, it can be said that Series C investors are significantly more self-interested as compared to seed-stage or A and B investors, given the exponentially lowered rate of risk associated with an already thriving company and business model.

More commonly, a company will end its external equity funding with Series C although some companies can go onto Series D and E rounds of funding as well. For the most part, however, companies that have already gained upwards of hundreds of millions of dollar worth of funding through Series C are prepared to continue to develop on a global scale.

In fact, the majority of companies that are going through and raising Series C funding use this as a means of helping boost their company valuation in anticipation of IPO. Most go onto seeking series D funding as the goals the company set out during earlier stages likely had not been completed yet.

Hierarchical Structure in a Venture Capital Firm

A typical venture capital firm is organised in a dual model as a limited partnership managing legally independent venture capital funds, with venture capitalists serving as general partners and their investors are limited partners.

Most venture capital firms are organised as management companies responsible for managing several pools of capital with each representing a legally separate limited partnership. How venture capital works is that Limited Partners cannot participate in the active management of venture capital funds if their liability is to be limited to the number of their commitments.

Why do Investors Work with VCs?

From the perspective of an investor, how venture capital works is that there are two main alternatives to invest in venture capital besides investing in venture capital funds: through direct investments in private companies or the outsourcing of selection of venture capital funds through investing in funds of funds.

Direct investments in private companies require more capital to achieve similar diversification as investing in venture capital funds.

Direct investments also pose another unique challenge as direct investments within venture capital usually require a different skill set which limits partners in venture capital funds typically lack.

Investors will need to realise that there will be an additional layer of management fees and expenses involved but institutional investors will thereby reduce the costs to the investors of the selection and management of their investments in different venture capital funds. It has been shown that within the world of how venture capital works are that the compensation of venture capitalists plays a critical role in aligning their interests with those of the limited partners.

An Analysts Role in a VC

The most junior level within a VC are analysts whose main responsibilities involve attending conferences to scout deals that might be within the investment strategy of the fund that the venture capital firm is investing out of. Analysts are not able to make decisions and are primarily concerned with conducting market research and studying competitors.

Associates Role in a VC

Next up on the ladder are associates and tend to be people with a financial background with good networking skills. Associates too do not make decisions within a firm but can make recommendations to those in charge.

Principals Role in a VC

Following associates is the role of principals who can make decisions when it comes to investments but have a lesser influence on the execution of the overall strategy of the firm.

Managing Partners role in a VC

The most senior people within the venture capital firm are partners who could either be general or managing. The difference in title varies depending on whether or not the painter has an influence on investment decisions or may also have an influence upon operational decisions.

In addition to investments, partners are also responsible for and will be held accountable for raising capital for the funds that the firm will be investing with.

Venture Partners Role in a VC

Venture partners are not involved in the day to day operations nor the investment decisions of the firm however they have a strategic role within the firm, mainly involving bringing new deal flow that they will then refer to other partners within the firm.

Venture partners are usually compensated using carry interest (a percentage of returns that funds make once they cash out of investment opportunities).

Investors of VC firms are called Limited Partners (LPs) who are institutional or individual investors that have invested capital in the funds of the VC firms that they are investing off of. How venture capital works is that LPs include endowments, corporate pension funds, sovereign wealth funds, wealthy families, and funds of funds.

Other Activities Performed by Venture Capital Firms

Fundraising as detailed above is the first activity that all new venture capital firms have to perform. How venture capital works is that successful venture capital investors usually do not manage only a single venture capital fund, but they also engage in fundraising activities to establish a venture capital fund but they engage in fundraising activities to establish a new venture capital fund some three to five years after the start of their previous fund.

The activities of a VC firm: Deals

Another challenge for a venture capital firm is to secure an adequate flow of high-quality business proposals to evaluate. How venture capital works is that the firms match venture capital investors with entrepreneurs can present some difficulties given market information asymmetries.

How venture capital works and from a venture capital fund’s perspective, it is essential to have access to the best propositions which may be problematic for newly established firms given that entrepreneurs would prefer to team up with investors with already strong reputations.

Besides, rather than generating their own deal flows, how venture capital works is that funds may attract investments proposals through their already existing network of co-investors or educate partners, making funds fairly isolationist and probably difficult to gain access to.

Are deals and collaboration in a VC world biased?

As a result, how venture capital works is that being able to general a high-quality level of deal flow may also depend on being able to enter syndication networks. Research has suggested the high likelihood of venture capital investors only being willing to collaborate with other investors whom they are familiar with through prior investments given that this provides more information about their specific capabilities and reliability, thus reducing the risk of hidden information and information asymmetry.

In addition to these duties, how venture capital works is that firms also must perform extensive checking and due diligence activities are given that VC investors are typically extremely selective. While large venture capital funds may receive hundreds of investment proposals annually, they eventually may invest in a portfolio of only 15-25 companies over a five year period as many investment proposals will in all likelihood not receive more than a few minutes of the attention of venture capital investors.

The activities of a VC firm: due diligence

Quick screenings whether or not a certain investment proposal would fit the spirit of a certain firm given that some investors specialise in certain investment stages, certain industries or certain geographic regions.

How venture capital works is that proposals that pass the initial screening are then subjected to in-depth due diligence tests before an investment decision can be made.

However, research has shown that investment decisions are clouded by local bias. Venture capital investors are known to exhibit preferences for investment in companies within the local home market because this eases information transfer.

This benefits the identification of investment targets, the evaluation of the ventures and then post-investment monitoring and the subsequent addition of value.

To reduce hidden action problems after investment, investors are strongly engaged with their portfolio companies usually with monitoring, assisting as well as certifying their portfolio companies. It has been shown that venture capital investors spend over half their time on monitoring and assisting their portfolio companies.

How investors in VCs lessen risk

Investors often require board seats which are linked with other powers such as veto rights as well as contractual provisions which allow them to directly influence the behaviour of their invested entrepreneurs. How venture capital works are that it is essential to have different prongs governing investments.

How venture capital works are that boards of directors in venture capital-backed companies are smaller and thus more involved in strategy formation and evaluation as opposed to boards where members do not have large ownership stakes.

In addition to this, the primary strategies used by investors include time, stage and sector diversification plus prorated investing over time as well as the number of investments within a portfolio.

Risk Mitigation: Time Diversification

The majority of VC funds are committed over a three to five year period. How venture capital works are that by being committed over a longer period of time and spreading out the commitments, a fund gets time diversity and also theoretically this has a soothing effect on the macrocycles that impacts a business.

Risk Mitigation: Stage Diversification

Certain VCs are specific and have early vs late-stage investing approaches to augment the risks posed by certain investments in certain stages. The goal here is to also smooth out irregularities that may occur during the course of the investments in the portfolio.

Risk Mitigation: Sector Diversification

Historically, VC firms have broad sector diversification, investing from software to life sciences within the same fund. This spreads out the macro and environmental risk associated with certain industries to compensate for others.

Risk Mitigation: Prorated Investment

Many VC firms reserve the right to invest their “pro-rata” ownership within future rounds, which then allows them to maintain their % ownership within the company.

Risk Mitigation: Number of Investments

There is conventional wisdom within the VC industry that each fund ought to have 25-30 companies within the fund to spread out and diversify. How venture capital works is that this spreading out of risk and mitigation of putting all your eggs in one basket will ensure higher certainty of returns in the future.


How Venture Capital Works Accessed 28 Sept 2020

In this article, we will learn about the early stage of venture capital, which include pre-seed, seed, and series A funding and preparation for an investor pitch. The early-stage challenge, opportunities, and risks are then discussed. Understanding these will help you to further grow your business.

Venture Capital

Early Stage Company

The term "Early Stage" refers to something that has only recently begun to happen or develop. In other words, it typically includes a tested prototype or service model as well as a business plan. Early-stage companies may not be profitable but some businesses may have breakeven.

Early-stage companies have not yet matured in the process but have only a newly developed business model that addresses at least one market pain point. This is also why they are called the startup phase which is phase one. They will focus solely on finalizing the products and services. At this stage, they will be collecting market data to assist them in making the final decision.

The funding also called seed funding or seeding will be the next step in developing the business before moving on to the next stage of growth. The process of funding involved gaining early-stage venture capital needed to further develop the business.

Series A funding is the next round of funding for an early-stage startup. The step demonstrates the startup's promising growth potential and accomplishments in the process of becoming a well-established business. This step allows the startup to secure a large amount of venture capital funding for the development of the business, as many investors consider series A funding to be the first stage of venture capital financing.

It should be noted that as an early-stage startup, significant effort must be expended to proof to investors that their business model will generate a Return on Investment (ROI), as investing in early-stage companies is risky.

The growth stage comes after the early stage. It is when a company has gotten off the ground and is working to increase its market share. The growth stage is in commercial operation and has solid customer traction. They are generating revenue and expanding rapidly. Companies are still working to become profitable at this stage.

6 Startup Venture Capital Funding Stages

Early Stage Venture CapitalStartup Funding Stages
- Pre-seed
- Seed Startup
- Early Stage
- Growth
- Global Growth
- Exit
Startup Funding Stage

Here is a breakdown of the six stages involved in the process of becoming an established company:

Pre-Seed Stage

At this stage, the business model is being developed and research is being gathered to support their requests to investors.

Seed or Startup Stage

Filling in details of the business model to increase its credibility.

Series A Funding

There is a sign of positive business growth.

Growth Stage

The stage contains the final version of the product or services currently being developed in the market.

Maturing Stage

The number of customers is increasing, including new and returning customers as well as increased sales.

Expansion or Exit Stage

A decision between scaling the business or concentrating on high market value and long-term Return On Investment (ROI). Typically, early-stage companies concentrate on custom acquisition. They have a sales strategy in place and are attempting to achieve a breakeven cash flow. The early stage may also generate revenue, but is also interested in raising additional capital from institutional investors to invest in customer acquisition and further business development.

This could be viewed as a process by which businesses progress from having a few customers to having a large customer base. The tools are all in place, but operations may need to be fine-tuned as the system learns and develops.  

Differences Between Early-Stage And Late-Stage Startups

Based on the stages above, the late stages companies will have developed past early-stage funding and rounds, proving that they have a feasible concept, a distinct understanding of their market, and statistics showing that the business product or service is gaining traction with customers. In other words, the late stages companies are one that has already achieved success.

These businesses have typically demonstrated a well-known product that is capable of operating effectively. The businesses typically generate a positive cash flow and have a strong market presence. It acted more daringly and began to enter ancillary markets. As the company prepares for an acquisition or an Initial Public Offering (IPO), investors may begin to look for liquidation at this point.

Early Stage Challenges

Understand that every new business is risky. Understanding the difficulties will enable them to become more proactive in preparing to deal with the risks. It’s crucial to always keep in mind that we should recognize the chances which can be taken advantage of to tackle the problems sooner rather than later.

Vision to Reality

Founders of startups are excellent visionaries. They can come up with and plan a fantastic business idea while also observing how success is produced in the future. They are very optimistic and have a great attitude which are desirable qualities for a businessperson. Visionaries, on the other hand, run the risk of ignoring the difficulties of reality.

Conducting research is necessary to avoid encountering problems that could have been prevented in the beginning. Establish a team with members who may have more extensive experience or advice on how to build a business in the real world. Be aware of industry regulations and requirements.

Obtaining Fundings

We've all probably heard the saying "it takes money to make money," so this one should be obvious. Startups and early-stage businesses can definitely attest to this. Even though early resources may be constrained, a lack of funding does not indicate that a business model is not viable.

Early-stage investment companies will invest in early-stage startups if they are confident that the business model is viable and will generate revenue growth, resulting in ROI.

Working with people who care about your long-term success, such as investors, business partners, consultants, mentors, and so on, is essential. Establishing these relationships and seeking out their funding-related advice is crucial.

Meeting Expectation

It can be challenging to persuade early-stage investment companies. Even though they specialize in early-stage venture capital, this does not guarantee that they will invest in you. They will almost certainly bombard you with questions after you pitch to them.

Meeting expectations will necessitate considerable effort and patience, as investing in early-stage startups is significantly riskier than investing in later-stage startups. You'll need to demonstrate your viability and credibility and keep highlighting your long-term success.

Keep in mind that data is power. The more research and growth data you can provide investors with, the better.

Securing Customers

Earning an early stage of secured funding is not the same as securing customers; it has a different level of difficulty. Customers are exposed to thousands of brands every day, they will eventually become so overwhelmed by the "new" that they will begin to block out and close down new brands in favour of those to which they are devoted.

In order to succeed, you must be tenacious in order to achieve recognition. One strategy for increasing your market visibility is to concentrate your marketing efforts on your niche until the market begins paying attention to you. Establish your authority by starting in a small pool.

Building Trust

Investors adore numbers, so growth statistics and data will help establish credibility. When building a trustworthy reputation, your personality is also crucial. You, your board, and your brand must be appealing to stakeholders and potential customers. For good reason, one of the most difficult aspects of running a startup is to develop trust and loyalty.

The Competition

Given the number of proposals a single early-stage financing firm can receive, competition is fierce and early-stage startup funding is difficult to come by. Hence, you must be tenacious to improve your market position and expand your business.

This entails consistently working to connect with prospective customers and investors, as well as seriously developing your marketing strategy. You want to increase your company's visibility and attract attention. As a startup, two ways to accomplish this are to cultivate relationships with journalists and to use social media.

Encourage people to spread the word about your news because word-of-mouth is a very effective tool for startups.

Early Stage Capital

The process of obtaining early-stage venture capital funding might seem overwhelming. However, everyone must begin somewhere. Early-stage investing is necessary before you can begin producing a positive cash flow.

Investors can become involved in companies from the very beginning. However, they typically first enter the market through early-stage capital. The purpose of this type of investment is to establish the initial operations and fundamental production. Early-stage capital helps in the development of a product or service by assisting with the process. The money raised may also be applied to the commercial production and marketing of the goods. Furthermore, the funds could be used to assist with sales.

Investors will be convinced if the business model offers high rewards at low risk, and funding will become easier to obtain. Investors might want to hold off on investing in businesses until the early stages because they may provide the best returns while lowering some of the risks. A company's seed stage investment has a high failure rate for investors.

In exchange for their investment in the seed round, the company's first formal round of funding, investors receive equity, stock options, or convertible notes.

Most of the time, venture capitalists must make a sizable investment in order to provide early-stage funding for startups. This is due to the fact that operational product or service development requires a significant amount of funding. As a result, the majority of startups divide their seed funding into smaller series.

Investors don't have to provide a sizable amount of capital all at once by having a small series of early startup funding rounds. Thus, their risk is reduced, and the company gains the capital needed to advance.

Most of the investment startup necessities are covered by early-stage capital to begin generating positive and continuous revenue. It's crucial to ensure that the company can maintain and manage these investments in a sustainable manner.

Advantages and Disadvantages of Investing in Early-Stage

The fundamental distinction between startup and conventional investment can be associated with numerous risks and rewards. We must weigh the advantages and disadvantages before investing in early stage funding.

Advantages of Investing in An Early-Stage StartupDisadvantages of Investing in An Early-Stage Startup
Fresh Innovation. There will always be new inventions and perspectives. Given the new technological advancements that have impacted every industry sector, it's worthwhile to consider which newcomers have the business model to innovate their niche.Valuation Risk. Consider what you're willing to pay and whether your share will increase in value over time because it might take longer for your investment to pay off for you. Spend some time learning about the security instrument you are purchasing.
High Reward. Investing in early-stage companies requires a sharp business sense and the capacity to project a startup's or early-stage company's future viability. You must be prepared to suffer an unexpected loss, but the right decision can result in great reward.Return Risk. Returns can be delayed. Returns from startups can take years to manifest. It is not recommended to invest if you require quick returns within a specific time. You must be adaptable when investing in startups and understand that it is not a quick-cash option.
Future Wealth. From an investment standpoint, taking part in early-stage funding rounds or investing in startups allows you to become more involved in the business's operations.Growth Risk. The success of startups depends on significant expansions. The effectiveness of management and available resources have a significant impact on the level of expansion. Before making an investment, inquire about the expansion planning and growth management procedures.

Advantages Of Investing In An Early-Stage Startup

There are numerous uncertainties in investing in startups that cause investors to reconsider before doing so. However, it is also an opportunity for investors to enter the market, which will produce significant results once the company has grown significantly.

Fresh Innovation

A new horizon for innovation and unconventional thinking is possible by making investments in the next generation of businesses. Alternative asset investments may only represent a small portion of your overall investment portfolio, but they can produce significant returns on a single creative business venture. Frequently, ambitious thinkers found new businesses, and they valued investors' and others' investment advice.

High Reward

Examining the startup funding process will allow you to earn both profit returns and additional profits over time. By making investments in exhilarating startups, you effectively reduce your risk. Although a specific profit figure has not yet been available, the business model will demonstrate whether the investment will yield a high return as the company expands.

Future Wealth

Adopting a long-term mindset will result in higher returns. By investing in early-stage venture capital funds, you are essentially securing your financial future. You're also unintentionally fostering the development of the sector in which you are investing by allowing more space for fresh investment opportunities in a market that is expanding.

Disadvantages Of Investing In An Early-Stage Startup

Early startup funding investment is based on speculative statistics which is why its funding is considered risky. Recognizing the potential risks will allow you to make good decisions before selecting the incorrect investment.

Valuation Risk

Startups are more challenging to value than publicly traded companies, whose stock prices are determined by the market. In a startup company, there is always a possibility of overpaying because you are most likely investing in company shares, which allows them to continue developing their products or services, which requires significant amounts of capital for early-stage companies.

Return Risk

There will always be concerns about business profit generation and guaranteed returns, and if your answer is uncertain, you should consider another investment option. The return on investment in a startup company is known to be variable and cannot be guaranteed.

Growth Risk

It is uncertain whether the company's planned and existing control systems will be able to accommodate future growth. To avoid losing money, wait for the business to mature and reevaluate your investment opportunity.  There is more assurance when investing in later stages. Despite it all, the rewards can be substantial if you're willing to accept the inherent risks of early-stage startup funding.


Be clear and concise about the business model before applying for early-stage finance. The investors will want to know the plan and preparation to support the validity of the company’s success. It will be more attractive if more data can be provided to convince the investors of the lower risk of investing in the business. Highlight the importance of the future challenge that the company may face in order to avoid and prepare for it.


What is Early-Stage Venture Capital?

Understanding Early-Stage Venture Capital

Why Early Stage Venture Capital?

More about Early Stage Venture Capital

Updated: 19/12/2022

Venture capitalists are investors who offer funding to start-ups or small businesses that want to grow. Beneficiary businesses are often seen to have tremendous growth potential, but the high failure risks associated with the possible return make funding from banks difficult or expensive.

Venture capitalists are people who are ready to take higher risks to gain higher profits in the future and invest in startup companies in exchange for a certain equity stake. Wealthy investors, investment banks, and other financial entities may be among them.

A creative company concept or an innovative technology startup is usually easy to get shortlisted by venture capital investors. The capacity to detect the growth potential of innovation is one of the most significant competencies of venture capitalists. They also have a considerable ownership share in the firms in which they invest, allowing them to engage in management. At the same time, the quit option is one of the important tactics for venture capital to quit from their investment cycle once achieve their profit targets.

Definition of Exit Strategy

Exit strategies are plans implemented by business owners, investors, traders, or venture capitalists to sell their stake in a financial asset if specific criteria are met. A withdrawal strategy explains how an investor intends to leave a particular venture. For instance, venture capital may design a departure strategy through an initial public offering (IPO).

On the contrary, an exit plan may be used to quit a non-performing investment or to end a loss-making firm. In this situation, the exit strategy's goal is to reduce losses. Catastrophic incidents or legal reasons such as estate planning or investors deciding to cash out are the reasons to implement an exit strategy.

Depending on the sort of investment, trade, or business activity, a good departure strategy should be established for every optimistic and bad scenario. This strategy should be done as part of calculating the risk of the investment, trade, or business activity.

Another term for exit is a liquidity event, and it refers to the conversion of an illiquid asset (stock in a business) into a liquid asset (cash). For VCs, acquisition and IPO are the two basic exit strategies of the investment and get the return on investment (ROI).

Business Exit Strategies VS Trading Exit Strategies

A business exit strategy is a plan in which an entrepreneur decides to liquidate their company's ownership to investors or another large corporation after a negotiation process. A quit plan enables a business owner to reduce or liquidate their ownership in a company while still generating a big profit if the company succeeds.

On the contrary, if the company fails, a departure strategy (or "exit plan") allows the entrepreneur to reduce losses. An investor, such as a venture capitalist, may also implement an exit strategy to plan for the cash-out of an investment. Before initiating a deal, a good investor should decide where they will sell for a loss and where they will sell for a profit.

An exit strategy is one of the vital keys to a trading plan. Many traders, for example, join a trade without an exit plan, and as a result, they are more likely to take profits too soon or, worse, run losses. Traders should be aware of the exits accessible to them and design a quit strategy that will minimize risks while locking in gains.

The differences between business exit strategies and trading exit strategies:

Business Exit StrategyTrading Exit Strategy
Business operations do not meet a predefined target.In the securities market, trading does not meet the predefined profit.
Cash flow dries up to the point that business operations are no longer productive.For losing trades, an investor should set an acceptable loss amount and use a preventive stop-loss.
External capital investment is no longer practicable.If a trade hits its profit objective, it can be liquidated immediately.
If another party has made an attractive offer for the company.Traders can be placed with a broker to sell or buy stocks automatically at a particular time or price.

Examples of Exit Strategies

Exit Strategy

Some of the most popular exit options for traders or owners of various sorts of investments are as follows:

  • You should start designing your exit plan in the years before, make sure you are able to fulfill obligations and increase your personal salary and pay bonuses to yourself. It is a common business retirement plan to implement.
  • The second strategy is selling all of your stock to current partners once you retire. You will get funds from the sale of your shares and will be allowed to leave the firm.
  • All of your assets should be liquidated at market value. Use the revenue to pay off debts and keep the remaining to plan your retirement.
  • Go through an initial public offering (IPO)
  • Proceed with an acquisition deal or merger with another corporation.
  • Transit the possession business to a family member.
Common exit plans, exit strategy
Common Exit Plans

Start-up Exit Tactics

Since the founding of their business, start-up founders have often established a departure plan. Entrepreneurs will use quit strategies to maximize their profit by selling their company at the proper moment. A great business leaving strategy will guide the entrepreneur through the entire business journey, ensuring that each stage fulfills the company's obligation to reach the ultimate objective.

For example, if becoming listed on the public stock market (an IPO) is the ultimate goal, your company has to go through specific financial steps such as pre-seed and fundraising from venture capitalists or angel investors to accelerate company development. Nexea is a well-known venture capitalist who assists and funds Malaysian startups.

Exit techniques that are commonly used include:

Initial public offering (IPO)

An IPO, or initial public offering, as an exit plan offers the highest return potential for the rare company that has the ability to evolve into an industry leader, producing steadily expanding sales in excess of $50-100 million per year. Getting publicly owned and traded on the stock market is preferable to the private acquisition of a business.

An IPO is a new round of equity financing, similar to any previous Series A, B, or C round: new shares are issued at a specific price. These shares will divide present owners, but the total valuation of the company will increase as a result of the offering.

Following an IPO, the firm will have public shares in the open market, and the stock price may fluctuate second by second. There is now a specific value for the VCs' investment at any given time. The stock is available for purchase.

Merger & acquisitions

Mergers and acquisitions (M&As) are the most typical way for venture-backed enterprises to leave. Companies constantly combine and acquire one another. This is referred to as the M&A market (mergers and acquisitions). M&A aspects require complicated activities such as evaluating businesses and arranging stock purchases. There are similarities in the rhythms of negotiating a business deal.

Accordingly, M&A specialists must verify that the cultures of the two merging enterprises can coexist. However, the environment is frequently significantly different. Whereas startups are challenged by rapid expansion and recruiting, mergers and acquisitions are frequently burdened by cost-cutting and layoffs when two organizations merge.

Generally, exit through acquisition is the more usual but less unicorn-like path. It is the easier and less expensive alternative to going public. When a startup is acquired, it must give up its larger aim of becoming its own major, public corporation. Furthermore, an acquisition does not always mean a loss for the company because the deal is based on the market cap. There are certain acquirers who are large enough to purchase unicorns.

Make it your cash cow

If you find yourself in a stable and secure market, where your business generates a consistent stream of revenue, you can repay your investors and entrust someone reliable to manage it on your behalf.

Meanwhile, you can utilize the remaining funds to pursue your next innovative concept. By doing so, you retain ownership of your business and reap the benefits of a steady income.

Stock buybacks

Stock buybacks are a win-win exit strategy for both startups and VCs. In certain cases, the founder of a company believes that the firm has the capability and desire to grow independently, without interruption from any outside sources.

A stock buyback occurs when a corporation purchases stock from an angel or venture capital investor. In this exit, the VCs receive their funds directly from the firm rather than through new investors in an IPO or another company in an M&A.

The Importance Of Planning A Good Exit Plan

It may seem illogical for a business owner to develop a departure strategy. For example, if you run a startup business with rising rapidly, why would you want to sell it?

In fact, planning a quit plan is usually the most underestimated aspect of a business strategy. However, it is critical in deciding your company's strategic future. Business owners and successors may find that their future alternatives are restricted if an exit strategy is not proactively planned. It is important for an entrepreneur to launch a departure plan in the business journey.

For example:

  • Personal medical issues or a family crisis: You might be affected by personal health problems or a family crisis. These difficulties might distract you from efficiently running the business. An exit strategy will assist in guaranteeing that the business operation runs smoothly. 
  • An economic crisis: Economic crisis can have a significant influence on your business, and you may wish to avoid assuming the effects of an economic downturn.
  • A surprising offer: Large players may be interested in acquiring your business. Even if you do not want to exit the firm right now, you will be able to have an intelligent conversation if you have considered an exit strategy.
  • A well-defined objective: If you have a well-defined exit strategy, you will also have a clear goal. Your strategic decisions are strongly influenced by your exit strategy.
  • Creating a smooth transition of business possession: A well-planned exit strategy allows owners to simply hand over the business to the management team and other stakeholders.

The Best Time to Exit Venture Capital Financing

There is no one-size-fits-all exit strategy for venture capital investments. The best time to exit and the most favorable exit option will depend on a variety of factors such as the company's performance, market and economic trends, and the goals and desires of the founder and investors.

Some common indicators that it may be a good time to exit include:

  • The company has achieved its financial and performance milestones and is generating consistent revenues.
  • The market conditions are favorable for a successful exit (e.g. high demand for the company's products or services).
  • The company is receiving interest from strategic acquirers or other investors.
  • The company has reached a point where the founder and investors believe it can continue to grow and thrive without their continued involvement.

It's important for both the founders and investors to have an open and flexible approach to exits and be prepared to adjust their plans as necessary. Additionally, it is also crucial to consider the potential impact on the company's future and your own role in it when choosing an exit option.

In Conclusion

In conclusion, an exit option is a business strategic plan established by an entrepreneur to liquidate their ownership of a business to investors or another company. A quit plan allows a business owner to reduce or sell their ownership in a company while still making a significant profit if the company is successful.

Most of the investors or institutions making significant capital investments in private companies will also seek to manage exit points and exit strategies across their investments. Generally, an exit point and exit strategy are part of long-term business investment plans.

An initial public offering (IPO) may be the best way out for certain investors. In addition, an investor will set a profit objective and affordable loss as part of an investment portfolio. As a result, a well-planned exit strategy is critical for a startup company.


Understanding venture capital exit strategies

Business exit strategies and trading exit strategies

Examples of exit strategies

Start-up exit tactics

The importance of planning a good exit plan

Five Smart Exit Strategies

UPDATED 21 January 2022

This article about VCs in Malaysia includes the definition of VCs, why companies need VCs, the VC environment, and of course, the list of Venture Capital funds in Malaysia and the rest of Southeast Asia. We have also included how you can find the right VC for your company as well!

How is Venture Capital defined?

A venture capitalist or VC is an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to equities markets. Venture capitalists are willing to invest in such companies because they can earn an impressive return on their investments if these companies turn out to be successful. Venture capitalists look for a strong management team, a large potential market and a unique product or service with a strong competitive advantage. They also look for opportunities in industries that they are familiar with, and the chance to own a large stake in the company so that they can influence its direction. At NEXEA we are interested in tech start-ups as this is our expertise.  

The video below further explains venture capital.

Why Do Companies Require Venture Capital Firms?

Is it true that Venture Capital fund managers always bring value to the strategy and execution of the business? That is far from the truth – from my experience, not many Venture Capitalists are able to bring in much value. Not only are they too busy managing 10-20 companies per partner, but they also have to manage many of their Limited Partners (investors) too!

However, any VC in this list of venture capital firms in Malaysia is more than just a fund. They will be part owners of a company and want to see this company grow so they will do anything to help a start-up succeed. At NEXEA we have ex-entrepreneurs who can guide start-ups and help them avoid mistakes they have made before when setting up their business.

The start-ups need venture capitalists as they are mostly rapid growing companies with inexperienced owners who do not always know what to look out for. To reduce the risk for the venture capitalist as well as for the start-up it is important that there is a great connection between the two parties.

"You will need to do the due diligence in order to really understand if a VC is going to add value in addition to capital. This value can be introductions for potential partnerships, their network of other successful founders, or the infrastructure the firm brings."

Is Venture Capital The Right Fit For Your Company?

Venture Capital is the most well-known method of raising funds, and for good reasons. The average yearly VC deal value has increased by nearly fivefold over the last decade. Companies that are ready to expand quickly with the willingness to give up stocks and listen to the VC investor's will benefit greatly from venture capital. VC investors are motivated to bring more than just money to the table since they profit (substantially) if your firm succeeds. In this regard, they are one of the most helpful sources of startup capital. Investors supply crucial information for running a successful firm, as well as marketing and sales guidance, networking opportunities, and industry contacts.

The publicity that comes with landing a significant deal can help young businesses build demand for their products and recruit top people. Although “VC” has become synonymous with “early business financing” due to its major participation in some of the most significant launches of the decade and genuinely exponential growth, the reality is that VC investment is the exception, not the rule.

Venture Capital in Malaysia - The Environment / Ecosystem

VC in Malaysia has been booming lately. There has been an increase in venture capital firms over the last couple of years. This increase has been very positive for the start-up environment in Malaysia. Venture capital has a great influence on a growing economy as well as job creation and transitioning into a knowledge-based economy. This is extremely important for Malaysia and this great environment has and will on having a great influence on the country.

Furthermore, the success rate of start-ups is significantly improved by venture capital in Malaysia. They bring in not just money, but also value like connections to corporates, and follow in investments from venture capitalists that do larger deals than they do. Eventually, the private venture capital market leads to private equity, mezzanine investors, or even public markets where Startups can eventually exit.

venture capital funds in malaysia / venture capital in malaysia

Difference Between Venture Capital And Angel Investors

People who invest in enterprises are known as venture capitalists and angel investors. When it comes to investing both angel investors and venture capitalists take measured risks in the hopes of making a profit (ROI).

So, what exactly is the distinction between angel investors and venture capitalists? Knowing the answer to this question can help you save time and choose the appropriate funding source.

Below are some important distinctions between angel investors and venture capitalists.

Angel InvestorsVenture Capital
An accredited investor who invests in small enterprises with their own money.A person or a company that invests in small businesses with money from investments firms, huge organizations and pension funds
Angel investors are more willing to invest in enterprises that are still in the early stage of development.To limit the danger of losing money, venture capitalists prefer to invest in well-established enterprises
Angel Investors may expect a 20% to 25% return on their investment.Venture capitalists could expect a 25% to 35% return on their investment.
Angel Investors serve as mentors to their proteges. They could give you advice on how to operate your business.Venture capitalists may demand that you form a Board of Directors and grant them a seat on it. They are often not interested in serving as mentors.

Very Early Stage Investment Venture Capital List Malaysia investing under US$1m

Venture Capital funds in Malaysia for early-stage startup companies are listed below:

Later Stage Investment VC Funds in Malaysia investing above US$1m

List of Accelerators in Malaysia (Idea Stage Startups)

We added this to our venture capital list because venture capitalists don't typically cover idea stage companies.

An accelerator is a 3-4 month program that helps Startups jump-start their business with about RM50k for about 8%. Startups that graduate should be able to raise funds. Accelerators usually offer mentoring and coaching, as well as networking opportunities.

Government start-up accelerators

Private start-up accelerators

Corporate start-up accelerators

List of Government Grants in Malaysia (Early Stage Startups)

A government grant is a financial award given by the federal government to an eligible startup. In Malaysia, this usually originates from the Ministry of Finance. 

List of Venture Capital in Southeast Asia

The Venture Capital Southeast Asia ecosystem has been growing significantly from previous years as the internet economy is rapidly expanding. According to Pitchbook, the venture capital dry power has increased up to eleven-fold in the past 6 years. This shows how competitive the VC landscape is in Southeast Asia as large international investors (Y Combinator, 500 Startups, GGV Capital, etc) start to focus on SEA, while regional VC investors (NEXEA, Asia Partners, Strive, etc) are doubling down.

View the full list of venture capital in SEA here.

Finding the top Venture Capital firms in Malaysia for your company

First of all, you have to know what stage your company is currently in. When you know what stage your company is in you can start applying to venture capital. To ensure you have the opportunity to pitch your company you have to prepare an informing pitch deck.

The infrastructure and “speciality” of the VC is the most interesting part to look out for, this is what separates the best from the rest. Venture Capitalists like Andreessen Horowitz or First Round Capital have a dedicated team of marketers, recruiters and other resources to bring into a company they invest in. At NEXEA, we have dedicated lawyers, regional level CFOs, many world-class CEOs that mentor and invest in Startups and other support infrastructure in place.

Lastly, set boundaries for yourself. Especially companies which are founded by multiple people it is very important that you know from each other what you are willing to give away. Giving away is not only in terms of equity but as well in time. When a venture capitalist invests in your firm the whole working dynamic can change as you hopefully transition to a fast-growing firm.

Steps to finding the right Venture Capital funds in Malaysia

In addition to some tips to find the correct venture capital firm for your company, we would like to supply you with some easy steps which you could implement to find via this venture capital list that fits your firm.

  • Geography: The location of your startup should be in the region which the VC is operating in. At NEXEA we invest in tech start-ups in the SEA region. However, for some programs, we prefer companies that are based in Malaysia as we are located in Kuala Lumpur. So do some research on the VC to know if your location is applicable to them.
  • Sector: Usually VC's only invest in companies that operate in fields of business where they have a lot of experience in. As discussed before at NEXEA we have a lot of expertise in tech-related companies. For us, a company which has a traditional business model would not be applicable.
  • Portfolio conflict: A VC will typically not invest in a company which is a direct competitor of a company in their portfolio. So before applying to a VC find out about there portfolio and see if you can identify any direct competitors.
  • Involvement: There are two types of VC firms, the first group are the VC's that are very involved. These VC's typically do not invest in a lot of companies as they do not have the time to be highly involved in a lot of companies. The second group of VC's are the opposite, these firms are not very involved in the companies they invest in. This is usually due to the number of start-ups they invest in. They simply do not have the time to have a meeting with each startup every week. At NEXEA we are highly involved with each start-up due to our start-up mentor network. For a start-up, it is essential to know from each founder whether they prefer a highly involved VC or less involved VC.
  • Fund size: A start-up has to know beforehand what series a VC invest in. It does not make sense to apply for a pre-seed start-up while you are doing your A-series. Furthermore, if you plan beforehand that you want to do you B-series and A-series with the same VC to ensure good collaboration, you should check whether or not they invest in both series.

List of Venture Capital Funds in Malaysia - Summary

There has been a growing number of venture capital firms in Malaysia which has had a very positive effect on the economy of the country. For startups wanting venture capital, it is important to identify at what stage they are as well as finding the right expertise and setting boundaries for the company.

We hope this venture capital list has provided you with enough knowledge. Let us know in the comments if there is anything we should add?

Learn More About NEXEA Venture Capital & How We Provide More Than Just Money here


Seeking funds is not a new thing for startup companies and there are various reasons why a company needs them. Their goals would play a crucial part in deciding the best way for it to generate funding.

Venture Capital (VC) and Equity Crowdfunding in Malaysia (ECF) are two of the most prevalent ways for businesses to generate funds. Traditional financing techniques, such as Venture Capital, give significant quantities of money from a small number of people, whereas ECF provides many small sums of money from a large number of people. According to the Securities Commission, Equity Crowdfunding has grown in popularity in Malaysia in recent years.

What Is Crowdfunding?

The utilisation of fair sums of funds from a large number of people to support a new business initiative is known as crowdfunding. Crowdfunding uses social media and crowdfunding platforms to connect investors and entrepreneurs, with the intention to encourage entrepreneurship by broadening the pool of investors beyond the typical circle of owners, families, and venture capitalists.

Types of Crowdfunding

There are many various forms of crowdfunding just as there are many different sorts of capital round raises for firms at all phases of development. The sort of product or service you offer, as well as your development objectives, will determine the crowdfunding approach you use. Donation-based, rewards-based, peer to peer-based and equity crowdfunding are the four main forms.

Four Types of Crowdfunding


Donation-based crowdfunding, in general, refers to any crowdfunding effort in which the investors or donors do not receive a financial return. Disaster assistance, charities, organisations, and medical expenses are all examples of donation-based crowdfunding campaigns.


Individuals who participate in rewards-based crowdfunding are expecting an exchange for a "reward," which is often a form of the product or service your firm provides. Despite the fact that this technique provides a reward to supporters, it is still considered a subset of donation-based crowdsourcing because there is no cash or equity return.

Equity Crowdfunding

Unlike donation- and rewards-based crowdfunding, equity-based crowdfunding allows contributors to become part-owners of your business by exchanging money for equity shares. Your contributions will receive a financial return on their investment as equity owners, as well as a portion of the earnings in the form of a dividend or distribution.

Peer to Peer Crowdfunding

This type of crowdfunding is often known as debt crowdfunding, which works similarly to a bank's term loan. You don't get the money from an institution; instead, you get it from individual people. This sort of crowdfunding is a little more sophisticated, involving mini-bonds, invoice financing and peer to peer lending.

Crowdfunding in Malaysia

Crowdfunding in Malaysia succeeds and grows through the supports given by the government who sees it as an opportunity to strengthen capital markets. Equity crowdfunding (ECF) providers have raised RM199 million (about $48 million) in the last five years. Despite the worldwide economic slowdown during the pandemic, the local market has grown by 278%. This is an incredible achievement for a country where alternative funding is still in its infancy. Let's look at how Malaysian equity crowdfunding got started, where it is today, and what the future holds for the industry.

The crowdfunding sector in Malaysia first started in the year 2015. The Deputy Finance Minister declared that Securities Commission (SC) Malaysia has allowed six businesses to provide crowdfunding services. Since then, 150 issuers have benefited from RM199 million collected through 159 campaigns.

Equity Crowdfunding in Malaysia / Crowdfunding in Malaysia
Equity Crowdfunding in Malaysia

In the aftermath of the COVID-19 pandemic, SC Malaysia took steps to boost the investment demands on markets:

  • Individuals are now eligible for a limited tax deduction for sums invested in ECF enterprises
  • Limit for ECF fundraising has been increased to RM10 million.
  • Companies having paid-up capital of up to RM10 million were granted access to the crowdfunding market.
  • To provide exit alternatives for ECF and Peer to Peer (P2P) supporters, a secondary trading platform was developed.

As a result, issuers successfully raised RM631.04 million via ECF and P2P financing platforms in 2020 (compared to RM441.56 million in 2019). According to the regulator, 57% of funds were collected for business growth, while 97% were raised for working capital. In addition, issuers shifted to greater fundraising sums in 2020, with 84% of campaigns raising more than RM500,000.

What is Venture Capital?

Venture capital (VC) is a type of private equity and funding provided by investors to startups and small enterprises with the potential for long-term growth. Well-heeled investors, investment banks, and other financial institutions are the most common sources of venture capital. It does not necessarily have to be in the form of money; it may be in the form of technical or management skills. Small businesses with outstanding development potential, or businesses that have expanded swiftly and are set to expand, are frequently given venture capital.

Types of Venture Capital

Many forms of venture capital are categorised according to how they are used at different phases of a company's life cycle. Early-stage funding, growth financing, and acquisition/buyout financing are the three main forms of venture capital.

Early Stage Financing

Seed financing, start-up financing, and first-stage financing are the three types of early-stage financing.

Seed financing is a fair sum of money given to an entrepreneur in order for them to be eligible for a start-up loan.
Companies are provided start-up financing in order to complete the creation of goods and services. Those companies that have spent all of their initial money and require financing to launch full-scale commercial operations are the primary beneficiaries of First Stage Financing.

Expansion Financing

Second-stage finance, bridge financing, and third-stage financing are all types of expansion funding.

Second-stage finance is given to businesses to help them get started on their expansion plans. It is offered with the intention of supporting a certain firm that is expanding significantly. Companies that use Initial Public Offerings (IPOs) as the main business strategy may be eligible for bridge financing as a short-term interest-only loan or as a kind of monetary support.

Acquisition or Buyout Financing

Acquisition finance and management or leveraged buyout financing are two types of acquisition or buyout financing. Acquisition finance enables a corporation to purchase specific components or the complete company. Management or leveraged buyout finance assists management groups to acquire a specific product from another firm.

Venture Capitalist in Malaysia

Malaysia's venture capital market has always been maintained by domestic companies, and it has lagged behind industrialised nations such as Japan, Singapore, Hong Kong, Taiwan, and Korea. However, independent venture capital companies in Malaysia in the last two to three years has marked another important change in the sector.

Previously, the majority of Venture Capital Corporations (VCC) were either government or bank-owned, and all of them preferred to manage their own funds rather than outsource to professional fund management firms. In 2004, the overall amount of funds, total investments from both domestic and international sources, the number of venture capital fund management businesses, and the number of investee companies all increased.

There are 2 types of VC companies in Malaysia namely:

  • Venture Capital Corporation (VCC): being a corporation that manages on its own behalf, investment in securities of venture companies in early business stages.
  • Venture Capital Management Corporation (VCMC): that manages on behalf of a VCC, investment in securities of venture companies in early business stages.

Venture Capital vs Crowdfunding in Malaysia

There are some main differences between Venture Capital and Equity Crowdfunding in Malaysia. One of the main differences between them is that Venture Capital usually needs lesser effort since companies only need to convince a small number of investors to fund their business. Whereas crowdfunding usually requires more marketing momentum since companies are needed to convince a larger group of people to fund their business.

Moreover, for Venture Capital, companies need to pique the interest of the right individuals through business partner introductions or self-introductions, pitch meetings, and networking events but in crowdfunding, companies are more towards digital and online marketing such as using pay-per-click advertising, mobile marketing campaigns, e-mail informative teasers, and other digital materials to reach the largest number of investors.

Crowdfunding Venture Capital
It expands your network, allowing you to reach a broader audience and spread the word about your brand.More advantageous for firms to aim to generate money rather than seeking to have a major social impact.
However, there are chances to have contacts in key financial vehicles, which may attract the attention of other larger investors.
Criteria set are less strict & more flexibleFollow criteria to select investment targets & less flexible
More likely to get "passive investors" or "spectators, will get lesser guidanceUsually comes with a higher level of engagement, will get more guidance from investors
The platforms used for crowdfunding usually take 5-10% of the fundraising round on average, which is also known as "success fee"Enable the firm to keep all of the money they received
The crowdfunding investor has all of the necessary information, after reading it, you can just click to invest, completely on your terms.The valuation may not necessarily be on your terms. Venture Capitalists may request a larger stake in your business if they see the potential.
Differences between Venture Capital and Equity Crowdfunding in Malaysia

Which One Should You Go For?

Both Equity Crowdfunding and Venture Capital funding are viable options for raising capital for your company. Make your choice depending on where you are in the lifecycle of your business and the significant differences that each of these crowdfunding techniques has to offer.

You are not limited to one single source of investment. Malaysian startups and business owners now have a lot of options because of the recent emergence of alternative business finance sources. All you need is a decent idea, a compelling pitch, and awareness of the fundings options available to you for the lifecycle of your business.

Here is some advice from the experts:

“If you have two choices,  VC would be better. Because the money they are giving is very smart money. They are going to support you much more than anything.  If you are running your startup alone, without VCs backing you, this means you are doing everything from scratch, but when you invite the VC on board, they have a lot of connections and a lot of experience.”

Dr Amr Hussein, CEO from Gainwells - Interviewed by Ethis

“Depending on the nature of the investor, the startup may want investors who actively help out or may want no disturbance. So, if you’re an issuer who is certain about what you are doing, go for VC, otherwise choose ECF.”

Umar Munsh, Co-Founder of Ethis

Final Thoughts

From Venture Capital to Equity Crowdfunding, there are now more diversified routes to acquire startup finance. Even though it can be challenging when it comes down to choosing whether you should focus on Venture Capital or Crowdfunding for your business, ultimately, what works best for you is determined by the nature of your firm and its objectives.

It's crucial to remember, too, that you should look into all of your financing alternatives. This may entail using crowdfunding to get your firm off the ground, followed by Venture Capital when you're ready to scale up.



Development of the Venture Capital Industry in Malaysia

General Overview of Venture Capital in Malaysia

How crowdfunding works

How to Decide Between Crowdfunding and Venture Capitalists

Overview of Crowdfunding in Malaysia

Types of Venture Capital

Venture Capital

Venture Capital vs Equity Crowdfunding: Which method is better when raising funds for your business?

What is Crowdfunding?

10 differences between equity crowdfunding vs. traditional VC funding

Typical venture capital businesses are founded with the goal of investing in startups in order to generate good returns for investors. The parent firm is still aiming for a positive return in the case of corporate venture capital (CVC) funds, but there are also major strategic considerations when evaluating possible investments. Investing in startups allows companies to be more flexible in their approach to pursuing growth prospects without having to create new teams and divisions from the ground up. Before making larger investments, they can make minor investments in startups to test new segments or technology.

What Is Corporate Venture Capital?

Corporate venturing, often known as corporate venture capital (CVC), is the practice of investing directly in external startup companies with corporate cash. Large corporations typically do this when they want to invest in small, but innovative, startup companies. They do it by entering into joint venture agreements and purchasing equity holdings. The investing firm may also give managerial and marketing experience, strategic guidance, and/or a line of credit to the business.

The meaning of CVC is frequently clarified by stating what it is not. Even though the investment vehicle is backed by a single investing business, an investment made through an external fund managed by a third party is not deemed to be corporate venture capital. Most notably, CVC is not the same as Venture Capital (VC), instead, it is a specific subset of it.

Characteristics of Corporate Venture Capital In Malaysia

The goal of corporate venture capital in Malaysia and the degree to which the investment company's and the startups' operations are intertwined. Venture Capital (VC) investments typically advance one of two core purposes, despite the fact that corporations have a variety of objectives for their VC investments. Some investments are strategic, they are undertaken primarily to boost the corporation's own sales and profits. A corporation making a strategic investment wants to find and capitalise on synergies with a new endeavour.

The other type of investment goal is financial, in which a corporation is primarily searching for high returns. Due to what it regards as its superior knowledge of markets and technology, solid balance sheet, and ability to be a patient investor, a corporation wants to do as well as or better than private VC investors. Furthermore, a company's brand may serve as a signal to other investors and future customers about the quality of the start-up, ultimately reimbursing the initial investor.

Another distinguishing feature of CVC investments is the degree to which the portfolio businesses are related to the investing firm's current operational capabilities. That is its resources and processes. A start-up with strong ties to the funding firm, for example, might employ that firm's manufacturing facilities, distribution channels, technology, or brand. It may build, market, or service its products using the same business methods as the investing corporation.

Benefits of Corporate Venture Capital Fundings

When seeking their initial outside cash, entrepreneurs can turn to a variety of sources, including friends and family, professional angel investors, venture capital (VC) funds, and crowdsourcing platforms. Corporate venture funds are a source of finance that is often neglected yet can be quite effective. Corporate venture funds come in a variety of shapes and sizes, but they are often funds linked with significant corporations that are interested in capitalising on industry-specific innovation. Investors that are loosely referred to as "strategic" represent a rapidly rising section of the capital market. Corporate VCs are a good alternative for entrepreneurs that want to get the most out of their investors because of the size and scope of these funds.

Validation Of The Market

Corporate venture capital funds can give startup access to established clients and help it find its product/market fit faster. The majority of organisations that create these funds have established client bases and can identify early adopters of new technology. For an unknown startup still trying to establish its credibility, gaining this type of admission can be challenging. The importance of determining product/market fit cannot be overstated because it paves the way for a company's initial set of paying clients.

Increased Revenue

Following market validation, forming a commercial agreement can help a firm generate much-needed revenue in its early stages. This should be a stand-alone arrangement that delivers market value to both parties and is unrelated to the investment agreement. You can reduce the need for outside finance while still demonstrating a sustainable business strategy by obtaining paying clients.

Expertise In The Field

Large organisations offer institutional expertise that can assist startups to think about issues relating to their target market because they have been in business for a long time. Insights gained through daily contacts with clients may have ramifications for a startup's product or marketing approach. In addition, a startup can raise its visibility in a crowded market.

Accessible To Capital

Securing a strategic investor's investment might encourage others to follow suit because if a strategic partner knows the industry and the problem and is ready to invest in a company, there must be value there. Furthermore, many corporate investors will participate in numerous rounds, whether they are investing from the parent company's balance sheet or through a specialised fund. This renewed commitment sends a favourable market signal and can help to alleviate the need for additional funding.

Inherent Exit Option

Investors frequently choose to liquidate their stakes in a company, especially if they purchase new businesses with pre-existing commercial agreements. Dependencies can emerge over time as a connection develops, prompting an acquirer to wish to hold the assets for offensive or defensive reasons. Due diligence is a little easier in these types of mergers because the acquirer is already familiar with the company's business and management team, which speeds up the process.

Stages of Startups Corporate Venturing Corporations Invest in

Corporate venture capital (CVC) firms in Malaysia invest in new businesses at various stages of their growth. Each phase has its own set of funding requirements, and corporate venture capital firm in Malaysia frequently specify the stage of financing required as well as the kind of investments they wish to make. Due to increased company or product valuations, later phases of financing normally entail less risky investments. As a result, investment in these companies typically costs more money. CVCs investing in new companies want to see a return on their investment in 4–7 years, whereas established companies are expected to see a return in 2–4 years.

  • Early Stage Fundings. Startup enterprises that can start operations but are not yet ready for commercial manufacturing and sales. A startup spends a lot of money on product development and early marketing at this stage.
  • Seed Capital Fundings. Money used to fund initial operating expenditures and attract venture capitalists is referred to as initial capital. Initially, the amount of money is usually minimal, and it is exchanged for a share of the company's equity. Investors consider seed cash to be hazardous, which is why some prefer to wait until the company is established before investing substantial sums of money.
  • Expansion Financing. Capital is provided to companies that are expanding by releasing new items, expanding their physical facility, improving their products, or marketing.
  • Initial Public Offerings (IPOs). In the long run, this is the optimum stage for most CVCs to achieve. When the fledgling company's stock is offered to the general public, the investing firm will sell its holdings to make a profit. Earnings will then be reinvested in new ventures with a high probability of future returns.
  • Mergers and Acquisitions. This entails using an investment fund to support a startup's acquisitions, as well as aligning the startup with a complementary product or business line that will help both companies project a comparable brand. When a corporation agrees to buy the startup, the investors will take advantage of the opportunity to profit by selling their holdings. Mergers also benefit the investment firm by allowing the startup to share resources, processes, and technologies. There will be cost savings, liquidity, and market positioning as a result of this.

Corporate Venture Capital Companies in Malaysia

Malaysia's venture capital business is booming. A slew of new venture capital firms has entered the market in recent years. There has also been a significant increase in the number of start-ups and new creative enterprises, which has resulted in an increase in pitching and fundraising activities. Here are a few corporate venture capital companies in Malaysia.

Corporate Accelerator: The Corporate Accelerator assists early-stage startups and scale-ups in achieving explosive growth by leveraging Malaysia's best investors, corporations, and support partners. They believe that deep ecosystem collaborations will lead to a  stronger Startup environment.

They strive to groom strong Startups with the help of their strong partners in order to establish Malaysia's future digital titans. The Corporate Accelerator programme is led by NEXEA and is co-organized with Malaysia's major Startup ecosystem partners.

TuneLab: TuneLabs is a venture capital firm based in Kuala Lumpur that focuses on identifying, funding, and nurturing early-stage firms in the travel, finance, and retail industries. The Tune Group seeks to give value to start-up firms at every level of their growth, from idea validation to eventual commercialization in many countries, by leveraging its large network of industries and substantial entrepreneurial expertise.

Hong Leong: Hong Leong Bank is always looking for new ways to provide fair, simple, personalised, and proactive banking experiences. They want to provide better service to their customers, as well as be a bank that helps the broader community overcome new difficulties and embrace digital solutions. They've worked with over 35 startups to rethink financial services, and they feel that working with the dynamic startup ecosystem is critical to fostering innovation.

Watch the video to understand the type of corporate venturing corporations that is made for you.

Difference Between Venture Capital And Corporate Venture Capital

The most significant distinction is that a Corporate Venture Capital (CVC) is concerned both with financial success and with having a strategic fit with the business in which it invests. As a result, the company can profit from the investment and leverage the CVC's strategic resources, such as its large network and client base. This is very important in the early stages of a startup. The company is also benefiting from the strategic investment because it is trying to enter the market with new and creative products and solutions.

Venture CapitalCorporate Venture Capital
Business angels, institutional funds, and corporations are examples of Limited Partners who supply the money to the Venture Capital, who subsequently invests it in startupsThe Corporate Venture Capital is an (in)dependent investing arm of a corporation that was created and is owned by it.
The benefits for startups is money, connections, and skill in scaling and the venture capital's network.The benefit for startups is know-how in the industry, market expertise, a client base, brand recognition, and a network
They strive for successful exits such as an Initial Public Offering (IPO) or a buyout from a different fund or corporationThey are not financially obligated to campaign for an exit. Instead, they concentrate on strategic synergies and long-term collaborations


A startup company can benefit from the industry experience, prestigious name brand, steady financial status, network of connections, and ecosystem of developed products provided by a large investing corporation. This relationship may lead to a partnership between the corporate venture capital (CVC) and its parent company, which can improve a business's worth immediately.


What is Corporate Venture Capital

Benefits of Corporate Venture Capital Fundings

Difference Between Venture Capital And Corporate Venture Capital

A very commonly asked question: What is Venture Capital? A Venture Capitalist (VC) is used to refer to an investor who provides capital to firms that exhibit high growth potential in exchange for an equity stake.

Private equity in recent decades has gained much traction in the financial world and currently represents a major component of the alternative investment universe although its functioning is difficult to define and often misunderstood. What is venture capital is an important question that contains many nuances.

Popularity of Venture Capital Funding

The Ernst and Young Global Capital Confidence Barometer illustrate this point in a survey with the question: “What will be the primary source of finance you will be leveraging to fund your growth strategies in the next 12 months?”, a question to which 20% of private company owners primarily named private equity financing, thus making it the second most popular choice behind private debt financing.

This thus indicates that VC is a clearly prioritised and highly sought after form of financing in the world of capital raising these days. Given that the business landscape in recent years has been one of the low-interest rates and technology-driven business models, this will challenge the way private equity firms have traditionally operated.

What does Venture Capital and Private Equity entail?

Private equity encompasses an array of investment and financing activities; activities of which include the restructuring of capital, buyout financing as well as venture capital.

So what is venture capital? For most purposes, Venture Capital is considered a subset of private equity and in its detailed form and definition, refers to an equity or equity-linked investments made specifically for the launch, early growth or expansion of companies. This is why venture capital is almost inextricably linked with start-ups and entrepreneurship.

What do Venture Capital Firms Look For?

What is a venture capital and what do most venture capital firms look for? Venture Capital target firms that are at the stage where they are looking to commercialise their idea, however, because of this factor, Venture Capitals tend to experience high rates of failure due to the uncertainty that is involved with new and unproven companies.

However, venture capitalists are willing to take on the risk associated with investing in unproven and green companies because they will then be able to reap the rewards of a massive return on their investments if these companies turn out to be profitable and a success.

What is Venture Capital and their link with Startups?

Start-ups have a symbiotic relationship with venture capitalists because a primary challenge being faced by small companies or start-up ventures is the inability to access equities markets, meaning markets in which shares of companies are issued and traded either through exchanges or over the counter markets, also known as the stock market.

These markets serve as one of the more vital areas of a market economy as it is instrumental in giving companies the access to capital to grow their business and investors a piece of ownership within a company with the potential realise gains on their investment based on the company’s future performance.

How are Venture Capital firms formed?

Venture capitalists are typically formed as limited partnerships where the partners then invest in the VC fund. A committee is typically tasked with managing the fund and making investment decisions and once-promising emerging growth companies to have been identified, the pooled investor capital that has been collected is then deployed to fund these firms in exchange for a sizeable stake of equity.

Myths and Misconceptions around Venture Capital

What is venture capital and some of the misconceptions surrounding it? A common misconception surrounding the concept of venture capital is that VCs generally do not fund start-ups from the onset. Rather, most venture capitalists seek to target firms which are at the stage where the firm is looking toward commercialising their ideas.

The venture capital fund will then buy a stake in these firms, nurture their growth and development and then look to cash out with a substantial return on investment, a performance measure used to evaluate the efficiency of an investment which is typically calculated by dividing the benefit (meaning, return) of an investment by the costs of an investment.

It is worth noting that contrary to the popular and public perception of venture capital as a major boon for financing new ideas, venture capital plays only a minor role in funding basic innovation. Venture capitalists invested more than 10 billion USD in 1997, but only 6% or so, around 600 million USD went to startups.

Research done by the Harvard Business Review reveals that less than 1 billion USD of the total venture capital pool goes toward Research and Development and the majority of the capital went onto fund projects that had originally developed through the far greater expenditures of governments (estimated to be around 63 billion USD) as well as corporations (estimated to be around 133 billion USD).

Venture Capital

Historical Context of Venture Capital

As a subset of private equity, the inception of private equity can be traced back to the 19th century, where century capital only developed as an industry post World War Two. Pre-WW2, much of innovative technologies or methods of funding were almost exclusively confined to being established within only big companies or wealthy families who had the means independently.

Particularly such circumstances were heightened by the social, economic and political environment of the world. The 1929 stock market crash followed by the Great Depression and World War II all culminated and served to create an environment that was decidedly not entrepreneur-friendly. Following WWII, the generation coming out of war and strife was full of innovation and new ideas as potential entrepreneurs began to arise within global financial market leaders such as the US and Europe whose economies were in a prolonged post-war boom phase.

What is Venture Capital: Roots of VC

The first formal trace of venture capital can be traced back to 1964 where Georges Doriot was responsible for establishing the venture capital cum private equity firm American Research and Development Corporation (ARDC) which raised 3.5 million USD, of which 1.8 million USD came from a variety of institutional investors and higher education institutions such as MIT, Penn as well as the Rice Institute.

How Legislature Impacts Venture Capital

These ventures into new methods of raising capital and finance were encouraged and further systematically structured through the passing of legislature to make the economic environment more conducive and friendly towards small and medium-sized enterprises such as the Small Business Investment Act.

This was particularly significant given that it is the act that is served to give tax breaks to print investment companies and as a result, professionals managed venture capital firms too emerged through licensing private, small business investment companies to finance and manage their start-ups.

Thus, driven by technological developments in ICT, Internet and biotechnology, the venture capital industry experienced extraordinary growth over the decades and is now also broadly accepted as an established asset class within many institutional portfolios worldwide.

Through examining historical trends and data, it becomes clear the significant role that venture capital now plays in emerging new world order and the global financial market. What is venture capital and its relation to any funds committed specifically for them? Funds committed to venture capital had increased significantly from 2.3 billion USD in 1990 to a record of 104.8 billion USD in 2000 within the United States.

what is venture capital

What is Venture Capital and the Impact of VC on the Technology Sector

By the end of the 1980s, venture capital was known to have funded major technology leaders such as Compaq, Intel, McAfee, Hotmail and Skype which then encouraged the growth of and ushered in a massive time of growth for the internet.

Despite as previously mentioned, these ventures having grown from the funding of far greater expenditures from the government and major corporations and so on, this still highly benefited venture capital firms as they provided frequent opportunities for new companies to emerge and go public as toward existing firms.

It also allowed and encouraged financing into the endless streams and groups of internets start-ups that would go on to change the landscape of technology forever such as Google, Facebook, Twitter and Pixa

Venture Capital in Different Geographical Regions

What is venture capital and its correlation with geographical locations? Similar trends have also been observed within Europe, Asia and Australia, where venture capital markets have grown significantly over the last decades. China for instance, at the moment, is leading the market as one of the fastest-growing venture capital markets in the world.

In addition, while the venture capital market has long been a local industry with local entrepreneurs primarily operating and gaining funding through domestic means, the last decade within the 2000s and 2010s has witnessed a significant and remarkable increase and growth in the international flows venture capital worldwide.

As local markets become increasingly competitive, venture capitals have seen the need and pressure to widen their geographical horizons whilst broadening their geographic investment criteria to include international and foreign countries so as to increase their portfolio diversification and search for higher returns.

How has Venture Capital Influenced Local Competition?

What is venture capital and how has it affected or influenced the local economy for good or bad? Individual experiences of past macroeconomic outcomes have been shown to exert a long-lasting influence on beliefs about future realisations, which explains the increasing competitively of local venture capital as well as domestic stock market investment. This can be seen within Europe, where the share of inflows of venture capital from non-domestic sources was just over 50% of the market between 2005 and 2009 and the share of total outflows accounted for by cross border investments equalled close to 35% of the market over the same time period.

Also, by 2013 VC-backed US public businesses capitalised 115 billion USD in research and developments vs a total of zero in the year of 1979, these VC backed businesses now account for a 42% of the research and development spending by US public companies. These show that it not only produces values for those companies on which this research and development budget is expended upon, the positive spillovers arising from the innovation and creativity of research also help and assist in the rest of the worlds technological and efficiency innovation. So what is venture capital? A way to help technology grow.

what is venture capital

Venture Capital in ASEAN

What are venture capital and its presence in the ASEAN region? For more information, click the following for more information on the venture capital within the ASEAN region specifically Singapore, Thailand, Vietnam, Indonesia and the Philippines.

Why does Venture Capital Exist and What Gap in the Market does it Service?

Beyond the need for financing, it has been indicated that the financing of entrepreneurial companies is addressed by primarily traditional sources of financing such as retained profits and owners funds and bank finance.

However, venture capital provides a more specialised set of investors that is unique.

Venture Capital firms as: Financial Mediators

What is venture capital and its role as finance mediators? In essence, venture capital firms exist as separate financial intermediaries, connecting willing investors with promising companies.

The main reason why venture capital firms thrive and exist is due to their superior abilities to reduce the cost of informational asymmetry related to investing in entrepreneurial companies and their ability to display investment strategies that allow them to cope with high uncertainty.

Asymmetric Information and How Venture Capital Combats this Issue

With asymmetric information, this persists as a problem within financial markets such as borrowing and lending because the borrower has much better information about his financial state than the lender. The lender has difficulty in knowing whether or not the borrower will default and to some extent, the lender will try to overcome this by looking at past credit history and the evidence of a reliable salary.

Asymmetric information is inherent in most if not all markets and arises when one party to an economic transaction has more or better information than another and then uses that to their advantage which in turn causes market failures including examples such as adverse selection.

Alternate Solutions to Asymmetric Information

Solutions to this issue include the introduction of regulations, offering warranties or guarantees etc. Free markets only work according to economic models that assume perfect information, the information is given and that is knowable in a way where all parties know all that is available but in reality, this is hardly ever the case.

Advantage of using Information Asymmetries Venture Capital Firms

Hence, venture capital investors have a comparative advantage over traditional financing sources such as banks and public equity investors in working in environments that are characterised by high information asymmetry and high uncertainty.

Within the entrepreneurship world, uncertainty is characteristic and endemic to the field. Spurred by economic liberalisation and the declining cost of communication, entrepreneurs need to turn their financial, technological and human assets into organisational resources that are capable of desired results.

High technology start-ups, in particular, the earliest types of organisations that the venture capital market found success in entering industries with very short technology and product life cycles where constant innovation is a must. Thus, when uncertainty hits, such entrepreneurs are already involved in a rather profound struggle, both to establish their companies and to survive.

Types of Informational Asymmetries

Two types of informational asymmetry typically arise within an entrepreneur and investor relationship, that of hidden information vs hidden action.

Hidden Information

Hidden information refers to the fact that parties hold different information as previously mentioned.

Outside financiers are also confronted with problems origination from hidden information or hidden action when they are investing in young, entrepreneurial companies.

Within the context of venture capital, adverse selection pertains to the risk that outside investors select low-quality projects, which have been presented to them and falsely advertised as high-quality projects.

This occurs due to the fact that entrepreneurs generally have an incentive to misrepresent any information in their possession especially during a task as personally involving as the search for financing. Clearly, as they are themselves involved in the operations of their business and know it intimately, hidden information occurs naturally.

How to Reduce the Risk of Hidden Information

To decrease the risk of adverse selection, venture capital investors engage in extensive information collection in a pre-investment due diligence process.

However, as is frequently emphasised there exists no systematic method of excluding all bias and projections within such delicate proceedings and the processes and instruments to reduce information asymmetries used by more traditional investors such as banks are insufficient to overcome hidden information problems within the context of investing in young companies and start-ups.

How other institutions reduce the risk of information asymmetry

Banks, for instance, employ extensive due diligence processes however much of this information is skewed and has a high focus on historical financial information.

However, many young companies and start-up have insufficient information let alone positive financial information. Without these number, traditional financing institutions can often be at a loss for how to proceed with the screening, valuation and evaluation of the company and start-up.

This remains the biggest obstacle for finance raising for young companies and start-up, the exclusion from traditional business social networks as well as capital and finance raising institutions due to these myriads of factors.

Furthermore, banks typically used collateral to deal with information problems however young companies with high potential often lack assets that may serve as collateral as the majority of their investments have a heavy research and development focus and therefore are intangible in nature.

The Role of Due Diligence

What is venture capital its role in due diligence? In contrast, much venture capital investors perform extensive due diligence prior to investing in order to reduce the nature of hidden information problems; focusing on creating more holistic and big picture reports, taking into account the value of the entrepreneurial team, the technology as well as product market characteristics.

Therefore, the characteristics that define companies that are raising venture capital are high growth, but high risk accompanied high prospects of profitability but that hold little collateral. 

Hidden Action

Other than adverse selection problems, outside investors are also confronted with hidden action problems, since they are unable to perfectly observe the effort and actions of entrepreneurs.

This could lead to a mismatch of exceptions including the fact that perhaps because of lack of communication, the goals of entrepreneurs and investors may not be perfectly aligned.

After the investment, for example, entrepreneurs may shirk effort or invest in pet projects that are aimed at achieving private, non-monetary benefits but that are at the expense of eternal investors.

Why VC's work Better than Banks as Financiers

What is venture capital's reason for being better than banks as financiers? It is acknowledged that venture capital investors have a comparative advantage over banks in order to reduce moral hazard problems because of the method of financing that banks provide.

Banks provide debt finance that involves a fixed claim, which is restricted to interest and principle payments which then gives banks limited incentives to monitor their creditors.

Venture capital investors however typically provide equity and equity-linked securities that entail a claim on the company’s residual wealth creation due to the promise of the return on their investment.

This creates a high incentive for VC firms to more tightly monitor their investment portfolio as well as reduce the risk of hidden action given that whatever actions the firm carries out will have an impact on the returns potential which is in turn impacted by the company’s level of value creation.

Which Firms are more suited to VC

Taking this into consideration, it could be said that raising VC finance rather than bank debt is more highly suited and optimal for companies that face higher risk and positively skewed cash flows, with a low probability of success and low liquidation value.

In addition, venture capital investors write complex contracts that service to align the goals of both entrepreneurs and investors, which then reduces agency risks.

Concluding Thoughts

Overall then it can be seen that venture capital investors have a comparative advantage as compared to other traditional investors such as banks to reduce informational asymmetries and operating in environments that are characterised by high uncertainty.

It has also been seen that venture capital as an industry does positively boost the economy, assist in job creation as well as introduce a new median to the market that could seize the market share for the next generation.

Venture Capital investors fill an important niche in the financing of young, entrepreneurial companies and their comparative advantages as compared to other investors, such as banks and relates to their relative efficiency in selecting and monitoring investments characterised by high informational asymmetries and high uncertainty.


What is venture capital?

The Venture Capital Southeast Asia ecosystem has been growing significantly from previous years as the internet economy rapidly expanding. According to Pitchbook, the venture capital dry power has increased up to eleven-fold in the past 6 years. This shows how competitive the VC landscape is in Southeast Asia as large international investors (Y Combinator, 500 Startups, GGV Capital, etc) start to focus on SEA, while regional VC investors (NEXEA, Asia Partners, Strive, etc) are doubling down.

Master List of Venture Capital Lists in Southeast Asia

Here is a list of articles that talks in detail about the venture capital ecosystem in respective countries across Southeast Asia.

Learn More About NEXEA Venture Capital & How We Provide More Than Just Money

This article talks about the Venture Capital Indonesia ecosystem where it answers the basic questions of what is venture capital, why do companies require a venture capitalist to listing down venture capital companies in Indonesia. Lastly, we provide several tips in helping you find the right venture capital firm for your company.

What is Venture Capital?

A venture capitalist or VC is an investor who either gives funding to startup ventures or supports small organisations that desire to expand but do not have access to equities markets. Venture capitalists are willing to invest in companies that fit in those criteria because they have the potential to earn a huge return on their investments if these companies end up being successful.

Some of the aspects that venture capitalists look for are strong management team, large potential market and a unique product or service with a strong competitive advantage. Also, they seek for opportunities that they are familiar with, and the opportunity to possess an enormous stake of the business so that they can influence its direction. Here at NEXEA, we are interested in tech start-ups as this is our expertise.

Why do companies require a Venture Capitalist?

You may be thinking, "Why do I need a VC? or What kind of value can a VC bring in to my business?" Well, it is true that not many Venture Capitalists are able to bring in much value. This is because they are too busy managing 10-20 companies per partner as well as managing their Limited Partners (investors).

Nevertheless, any VC is more than just providing funds. Since they will become part the owner of your business, they would want to see the company grow as well by providing any necessary help succeed a startup. At NEXEA, we offer to our invested startups ex-entrepreneurs who can guide young entrepreneurs with their business as well as provide some advice to avoid making the mistakes that they have made in the past.

For entrepreneurs and CEO of rapidly growing companies, most of them are inexperienced and they do not always know what to look out for. That is why a lot of startups need venture capitalist and in order to lessen the risk for a venture capitalist, it is important that startup founders are being connected to industry experts.

"You will need to do the due diligence in order to really understand if a VC is going to add value in addition to capital. This value can be introductions for potential partnerships, their network of other successful founders or the infrastructure the firm brings."

Venture Capital Indonesia - Environment

Currently, the ecosystem of venture capital Indonesia is the second-largest in Southeast Asia, with Singapore maintaining its position as the leading market and Malaysia is in the third position. According to Deal Street Asia, Indonesian venture capital companies has raised up to US$582 million in 2019 which is a 79% increase from the previous year.

Being a country that has a large population, Indonesia has the potential to become the fourth-biggest economy in the world, surpassing Singapore. McKinsey noted that Indonesia's e-commerce sales are expected to rise around 17%-30% within the next five years. With such potential for technology disruption and growth especially in the focused industries, such as e-commerce, fintech and halal lifestyle, the Indonesian tech story is just beginning.

venture capital indonesia

Very Early Stage Investment Firms in Venture Capital Indonesia (<US$1m)

Later Stage Investment Firms in Venture Capital Indonesia (>US$1m)

Finding the right venture capital firm for your company

The first step to finding the right venture capital Indonesia firm for your company is to know what stage your company is at right now. After figuring out the stage of your business, you can start applying to venture capital. Remember to prepare an informing pitch deck so that you have a higher chance of getting funded when pitching your company. Here are some examples of how a pitch deck should look like made by other successful companies.

Secondly, in order to find the best VCs, you should look out for their infrastructure and "speciality". It is best to find VCs that specialised in the industry that your company is in because you will then be provided with the best support tailored to your needs. Venture Capitalists like First Round Capital, Y Combinator or 500 Startups have a dedicated team of marketers, recruiters, experts and other necessary resources to bring into the company that they invest in. At NEXEA, we have dedicated lawyers, regional level CFOs, a lot of world-class CEOs that mentor and invest in startups as well as other supportive infrastructure in place.

Lastly, it is important to set some boundaries for yourself. If your company are one of those companies that are founded by multiple people, it is very important that there is a mutual understanding between each other on what you are willing to give away. Giving away is not only in terms of equity but in time as well. When a venture capitalist invests in your firm the whole working dynamic can change as you hopefully transition your company into a fast-growing firm.

Steps to finding the right venture capital firm

Besides that, here are some additional tips on how to find the right venture capital firm for your company. We've made it into several easy steps where you can easily implement through the list of companies in Venture Capital Indonesia to see which ones that fit well with your firm's needs.

  1. Geography: The location of your startup should be in the region which the VC is operating in. At NEXEA, we invest in tech startups in the SEA region. However, for some programs, we prefer companies that are based in Malaysia as our HQ is located in Kuala Lumpur. Thus, do some research on the VC to know if your location is applicable to them.
  2. Sector: Usually VC's only invest in companies that operate in fields of business where they have a lot of experience in. That goes to show why at NEXEA we invest in tech startups because we have a lot of expertise in tech-related companies. For us, a company which has a traditional business model would not be applicable.
  3. Portfolio conflict: A VC will typically not invest in a company which is a direct competitor of a company in their portfolio. So before applying to a VC, you should find out about their portfolio and see if you can identify any direct competitors to your company.
  4. Involvement: There are two types of VC firms. The first group are the VCs that are very involved. These type of VCs typically do not invest in a lot of companies as they do not have the time to be highly involved in all the companies that they invest in. The second group of VCs are the opposite where these firms are not very involved in the companies they invest in. This is usually due to the number of startups they invest in. They simply don't have the time to have a meeting with each startup every week.
    At NEXEA, we are highly involved with each startup due to our startup mentor network. For a startup, it is essential to know from each founder whether they prefer a highly involved VC or less involved VC.
  5. Fund size: A startup has to know beforehand what series a VC invest in. It does not make sense to apply for a pre-seed startup while you are doing your A-series. Furthermore, if you plan beforehand that you want to do your B-series and A series with the same VC to ensure good collaboration, you should check whether or not they invest in both series.

Venture Capital Indonesia Summary

The number of venture capital firms in Indonesia has been growing rapidly which is reflected by the growing number of startups that are starting and growing in the region. For startups wanting a venture capital, it is crucial to first identify the stage of their company is as well as setting boundaries for the company in order to find the right expertise needed for the company.

We hope this article has provided you with a head start on what you should be looking for in a venture capitalist. Let us know in the comments section if there is anything else that you would like to know more about venture capital Indonesia.

If you'd like to know more about venture capitalists in other Southeast Asian countries such as Malaysia, Singapore, Thailand, Vietnam and the Philippines, check out the Southeast Asian Venture Capital article.

Learn More About NEXEA Venture Capital & How We Provide More Than Just Money


Related Posts

Subscribe for more right in your inbox!

Thousands of subscribers cannot be wrong! Get Startup insights right in your inbox. 
We will only use your email to send you insights once a month - no spam!
Subscribe To Our Startup Insights

Written by Pinky

How useful was this post?

Click on a star to rate it!

Average rating 5 / 5. Vote count: 8

No votes so far! Be the first to rate this post.

Leave a Reply

Your email address will not be published. Required fields are marked *

Join The Largest Gathering For Startup Founders & Co-Founders In Malaysia
Pre-register for the next summit!
Subscribe To Our Startup Insights