What is venture capital and how does it work?

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The Venture capital is an investment model that promotes the development of companies with high potential in their industry. This alternative emerged in Mexico for more than a decade to detonate key sectors in exchange for better returns.

Venture capital firms are made up of a group of investors who place an amount of capital in a fund designed to stimulate the growth of small businesses. These types of projects generally have a novel product, but also with many risks.

In this type of investment, the entrepreneur must be willing to give up a high percentage of his shares, explains Edwing Márquez, economist and professor at the National Autonomous University of Mexico (UNAM).

"It is nothing more than applying funds, that is, capital, to companies that have potential and that are not listed on the stock market," says Edwing Márquez.

What is venture capital?

Venture capital supports the growth of startups and those with great potential for rapid and substantial growth, even in larger venture capital funds, as defined by Silicon Valley Bank, SVB . 

On the other hand, this investment model is an important economic and development engine for the countries because: 

  • Generate jobs
  • drive innovation  
  • Create new business models 

According to SVB, the investment in venture capital is made in exchange for a portion of the company's shares. In this sense, investors in this model have a long-term vision, and their expectations are to obtain favorable returns once the company is sold or goes public.

Private equity funds invest in early-stage companies that are generally not candidates for another type of traditional investment such as a bank loan.

For investors, committing their capital to a Venture Capital represents a return option. Although it also requires experience and strategic advice to add greater value to the portfolio. 

Another private equity investment alternative that drives companies in a growth or expansion phase is private equity. With which these types of projects are promoted in exchange for an opportunity to obtain high returns.

How does this investment model work?

To understand how venture capital works, there must first be a group of investors interested in investing in a small business. Thus, the members of the fund include this project with a high potential for growth and profitability in their investment strategy for  approximate terms ranging from 3 to 10 years.

Now, for all this to work, there is a process. These are the stages of how a venture capital investment works.

  • Stage 1: It is the injection of the initial capital that usually lasts up to a year. With this money, the venture capital makes the venture carry out market studies and review the potential of its products or create new ones.
  • Stage 2: More capital is added. The operation of the company, marketing and sales are also established, in addition to beginning the search for new investors, this process usually lasts two or five years.
  • Stage 3: la empresa generó sus primeras ganancias. En esta parte, la empresa ya está consolidada y lista para lanzar una oferta pública para expandir  su negocio y  cotizar en la bolsa para vendar las acciones y así el fondo de venture capital recupere su inversión. Esta etapa suele durar  tres años más.

Venture capital is a long-term investment and is made only in local or regional companies. Also, if the business is doing well, your stake will usually be increased, since the returns to investors will also be higher.

At WORTEV CAPITAL we are pioneers in the private equity industry in Mexico. We invest in emerging companies through our venture capital fund. Conoce nuestra estrategia y modelo de inversión en el Ebook: ¿Qué es WORTEV CAPITAL?

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Venture capital is a key player at the economic core of innovation and entrepreneurship.

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