What is venture capital: how does it work and its importance for startups?

Access to capital, expertise or contacts are some of the advantages offered by venture capital for the startup ecosystem.

que es venture capital
Communication Team

Telefónica

Reading time: 4 min

What is venture capital

Venture capital (or risk capital) is a financial operation in which capital is provided to startups and companies with growth potential and high levels of risk in exchange for a percentage.

It is one of the main sources of financing for startups that are in the growth phase and that have previously used other sources of financing such as FFF (friends, family and fools) or seed capital.

But… what is a startup?

A startup is a newly created company with growth potential and a scalable business model.

While it is true that it is a term that can refer to companies from all fields, its use is usually linked to those with a technological component and linked to the world of the Internet or new technologies.

Thus, startups have a series of characteristics such as scalability, technology and innovation, global focus, youth and low initial cost.

How venture capital (VC) works

As mentioned above, venture capital refers to investments made through shares with the aim of financing startups.

It is a high-risk financial operation where very high returns can be obtained, although it is true that since these are companies that are just starting out, it is relatively likely that losses may be incurred in the first few years.

Venture capital has a series of phases:

  • Fundraising. Prior to any investment, the venture capital firm seeks financing and funds from different investors.
  • Investment search. Once investors are found, investment opportunities are sought.
  • Investment commitment. It is decided where to invest and how much will be allocated to each investment. It is important to remember that, since we are talking about nascent companies, the returns do not necessarily have to be positive at first.
  • Investment management. Once all the funds earmarked for this purpose have been invested, the venture capital firm begins to manage the companies that are going to invest in it. It is at this stage that the investment begins to bear fruit.
  • Liquidation of the fund. The fund is closed and the profits are distributed among the investors and the venture capital firm.

Importance of venture capital for startups

Venture capital plays a very important role in the startup ecosystem by providing capital to young companies that need to grow and scale.

Without the ability to access this venture capital, many startups would not have the ability to raise the necessary funds with which to develop products, promote them or even hire staff.

This important source of funding, especially relevant in the early stages, has a number of advantages for startups:

  • Access to capital. These investor profiles usually provide larger financial amounts than other profiles (such as angel investors or family and friends), something that can change the initial development.
  • Knowledge and experience. In addition to the economic amount invested, venture capitalists also bring with them higher levels of experience and knowledge than the founders of the startup.
  • Network of contacts. Potential customers, suppliers or other investors may be more accessible thanks to venture capitalists.
  • Validation. Indirectly can help obtain more funding from other investors as the presence of certain venture capitalists is seen as a vote of confidence.
  • Pressure to perform. Having to deliver on the promises or expectations of investors can be helpful in keeping startup founders motivated.

Telefónica Ventures: strategic investments

In order to address the challenges faced by the telco industry and create new businesses aligned with the operator’s strategy, Telefónica Ventures invests directly in startups or through a network of venture capital funds to find and finance startups that can be strategic partners of the company by providing differential technology or new products.

It is therefore an open ecosystem that drives the operator’s business worldwide, but with a local presence.

Telefónica Ventures invests through the following channels:

  • Direct. The investment is made in startups with global impact throughout the company’s value chain, sponsored by the technical areas and with a work plan to be developed within Telefónica’s presence.
  • Indirect. Through the VC fund network, with presence in key innovation ecosystems for the company. They provide operational partnerships, strategic ideas or market insights, multiplying the scope of scouting.
  • Leadwind, an independent VC fund that is open to the participation of both public and private investors. The investment is in fast-growing technology-based and transformational startups located in Southern Europe and Latin America.

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