A Dictionary of Finance discovers that venture capitalists aim to make their money through innovative companies that ‘disrupt’ the way things have been done before.
Venture capital is risk capital that finances innovation. Risk capital is used to finance innovative companies that a typical bank would think too risky.
If you want to set up a bakery, your local bank will probably be able to predict whether it will be a success or not. If it’s a yes, they’ll lend you the money to rent a store and equipment and to pay workers. That’s because bakers have been making bread and pastries for centuries.
But what happens when you go to a bank with a new idea that might make a lot of money or might fall flat? The bank will probably focus on the possibility of losing its money and say, No.
Instead, you’ll have to take that idea to a venture capitalist. A venture capitalist funds “disruptive” businesses whose outcome can’t be easily predicted.
Allar and Matt are joined on the podcast by Uli Grabenwarter of the European Investment Fund. Uli explains how elephants (and Latin translation classes) got him on the road to entrepreneurship.
Uli talks about venture capital, risk capital and entrepreneurship. He helps us define:
Seed funding. The first capital that goes into a company, when a venture capitalist makes a bet on a company. The funds are used to develop a prototype business model or to create some market evidence that there’s traction in your idea.
Mezzanine capital comes at a fairly late stage in the development of a company when it’s almost ready to get loans from banks. Mezzanine provides funding without diluting the ownership of the founding team. It comes from a venture capitalist, from specialist mezzanine funds, or private equity funds.
Finally Uli tells us how venture capitalists get out of their investments.
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