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Many of the successful high-technology companies that are generating hefty revenues got their starts in large part thanks to venture capital financing. Venture capitalists provide start-up capital to new businesses, often in the technology industry, in need of financing in order to grow or continue operations. Often considered a risky investment, venture capital has also historically generated sizable returns for participants. Companies typically need more than one capital injection, and a venture round represents one cycle of financing extended to start-up businesses by venture capital firms. Risks associated with venture financing are due to the fact that many of the technologies and ideas that are presented remain unproven, and the success of the new business is not guaranteed.
The initial venture round of financing that entrepreneurs typically receive is a series A round. To win this early stage of financing, a start-up company must be successful in marketing a product, idea, or service in addition to presenting some profitability model to financiers. Typically, the message will be delivered to multiple venture capitalists before any funding is received. This first venture round could be vital to continue production of a product or just to keep operations running and carries the greatest deal of risk for the financier.
When a financier is sold on extending capital to a new business, the entrepreneur will typically be presented with a term sheet outlining the terms of any financing arrangement. If the business owner agrees, a venture capitalist firm is selected, and the first venture round is complete. Subsequent rounds of venture financing may or may not come from the same backers.
It is quite possible that, after a series A round of financing, a company will need to turn to financiers again for another venture round. The reasons for a subsequent round could be for expansion purposes or even to continue the payroll and possibly hire new employees. If a venture capitalist recognizes true growth potential in the start-up firm and expects that the company will be a market leader of some sort, the financing will likely be extended. A second venture round, or series B round, is likely to be worth more than the previous investment because the company has earned more of an operating history at this point. When a venture round is completed, the company might issue a press release to publicly reveal the size of the investment and the name of the venture backer.
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