Venture capital is a subset of private equity. It involves equity investments, ideally in comparatively newer companies (as compared to typical private equity investments) which are just launched or planning a start up or for expansion of a business. Venture Capital funds invest in young companies often developing a new product or technology.
Venture capital is majorly categorized by the progress of development of the company ranging from early stage capital investment used for the initiation of the start up companies to late stage and growth capital investment that is used to fund growth of business that is generating profit but might not yet be profitable or generating enough capital to fund future growth.
Entrepreneurs often come up with ideas and products that require substantial amount of capital in the start up stage or for the first few years. Many entrepreneurs do not have enough capital to finance the business by themselves, and they must therefore seek outside financing. The venture capitalist's need to generate high profits to compensate for the risk these investment which makes venture funding an expensive capital source for companies. Venture capital is most appropriate for businesses with large capital requirements which cannot be financed by cheaper alternatives such as debt.
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