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What Is Venture Funding?

An angel investor is willing to take a chance on a new idea for a business by providing funding for the project.
Venture capital can be used to fund a start-up company's manufacturing costs.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 November 2014
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Also known as venture capital financing or venture capital funding, venture funding is the process of investing in a new business, or in a new project that is about to be launched by an existing business. In many cases, funding ventures of this type is intended to provide a significant return on the investment, especially if the project is considered to be somewhat risky. For the most part, the funding supplied by investors is used to operate the business or project during the early stages, with any returns delayed until the venture is able to turn a profit.

Investors who choose to be involved in a venture funding strategy are often called angel investors. The name is indicative of the role that these investor play in the launch of a project that may or may not be attractive to more conservative lenders or investors. An angel investor is willing to take a chance on a new idea for a business, even if the idea remains somewhat unproven at present. Many angel investors consider themselves to be visionaries, and enjoy the challenge of being involved with a venture that carries a higher level of risk.

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There are a number of approaches to venture funding. One involves securing funding from a single investor. With this arrangement, the investor agrees to provide the funding necessary to keep the business in full operation for an agreed-upon period of time. The expectation is that at the end of that cycle, the business will have begun to build a client base, and has developed the ability to generate enough revenue to cover all costs, including issuing payments to the investor.

In some cases, business owners prefer to solicit venture funding from more than one angel investor. This has led some investors to band together and form venture capital groups, also known as venture funding groups. All the members of the group pledge a certain amount of resources in exchange for a percentage of the profits generated from the venture. This approach can often allow investors who are unable to underwrite an entire project to still participate, and possibly earn a return on their investment over time.

Successful venture funding arrangements always include clear terms that identify the rights and responsibilities of all parties involved in the venture. The terms of repayment are also included in the agreement, including any options to acquire shares of stock should the venture reach a level of development where that approach is feasible. While some venture funding agreements are very simplistic, others can be extremely complicated. For this reason, all parties should have legal representation by counsel to articulate the terms in language that the investors and owners can both understand.

Along with the terms that investors and business owners agree to, many countries also impose some terms on this type of investment. For this reason, it is important to make sure that any venture funding strategy complies with any regulations that apply to the jurisdiction where the business resides. Failure to do so can result in significant fines that could undermine the profitability of the entire project.

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