Venture Capital Financing: Types and How They Work

Venture Capital Financing: Types and How Each Works

Venture capital financing puts equity into private companies. Learn the main types, from equity financing to private and public firms, and how they work.

By Socialia Newsroom

Published December 21, 2020, 3:02 PM WIB 3 min read

Venture capital is an investment in the form of financing, taking an equity stake in a private company, the partner company, for a set period. In Indonesia, venture capital financing is already regulated by national law. Small and mid-sized business owners can grow with help from capital owners, or investors. Business expansion plans can be realized quickly with investor capital, and under agreed rules and terms, business owners and investors can work together to move the company forward. Financing comes in different forms, depending on its function and how it works. Here is a look at the types of venture capital that can be applied in business.

Equity Financing is direct financing. The investor can take a share of the partner company's stock.

Semi Equity Financing is financing through the purchase of convertible bonds issued by the partner company.

New Company is where the venture capital firm sets up a new company together with the partner company.

Profit Sharing is a type of financing often given to small businesses that do not yet have PT (Perseroan Terbatas, or limited liability company) legal status, although companies that already have PT status can use it too.

Single Tier Approach is where the investor raises funds and manages the money invested as equity in the partner company.

Two Tier Approach involves two separate business entities, a fund company (the provider of funds) and a management company (the manager).

There are other ways of raising capital that divide venture capital into:

Leverage Venture Capital is venture capital that comes from one capital company, with funds raised as loans from various parties.

Equity Venture Capital is venture capital whose funds are raised as the company's own capital in various forms.

By ownership, the types of venture capital are as follows:

Private is an investor company that has not yet sold its shares on the stock exchange, or has not gone public.

Public, an investor company that has already sold its shares on the stock exchange.

Bank Affiliate is a company formed by a group of banks that have extra profits or a specific purpose in financing.

Conglomerate is an investor company made up of several companies.

Investor companies and partner companies can help each other. The investor profits by putting capital into a company that needs financial help to grow its business. The profit can take many forms and is split as agreed at the start, before capital is released to the company. This matters a great deal to business owners, especially small and mid-sized ones, because they often run into cost barriers when they try to expand. With venture capital, the company's financial problems find a solution.