Venture Capital

Venture capital is equity capital for young, high-growth companies. Investors provide money to early-stage companies and receive shares in return. They take a high risk, but hope for above-average returns if a start-up succeeds.

The business model follows a clear logic: because a substantial share of holdings fails wholly or partly, a single success must carry the whole portfolio. Investment therefore goes not into companies that grow solidly but modestly, but into those with very large market potential. Conventional bank debt plays a limited role in early stages because collateral and predictable cash flows are often absent. In later stages, venture debt can supplement equity. Investment proceeds in rounds from pre-seed through seed and Series A to later growth rounds, with a fund reserving a substantial part of its capital alongside initial cheques for follow-on investment in the successful holdings.

The investment is protected not by security but by contract: liquidation preference, anti-dilution protection, consent rights, information rights, vesting and transfer provisions. Venture capital differs from buyouts in almost every respect, in particular through minority stakes, the more limited use of leverage and the weight given to the team over current earnings. Typical funds hold 20 to 40 companies. In Germany, KfW Capital, the High-Tech Gründerfonds and the federal states' investment companies are important providers of capital.