What is a Venture-Capital-Backed IPO?

A venture-capital-backed IPO is the prior offering of shares to the general public by a firm. This firm manages to receive funds from the private investors. A venture-capital backed company can go for an acquisition instead of an IPO. Be it an IPO (Initial Public Offering) or acquisition, these alternatives are referred to as exit strategies as the entrepreneurs and venture capitalists can make an exit or take money from their investments whenever they want to.

How does a Venture-capital-backed IPO Work? 

Different sources give timely reports on the volumes of venture-capital-backed IPOs and M&A. When the economy is lean, there are lesser possibilities of venture-capital-backed IPOs due to investors being less confident. After the financial global crisis, there were less number of venture-capital-backed IPOs seen in the year 2008 and 2009. Tesla Motors and Open Table are some of the companies that started as venture-capital-backed IPOs.

What is venture capital?

Venture capital refers to a form of private equity that firms offer to a budding company after predicting its prospective chances of growing in the future, or its present status in terms of growth. The venture capital firms use this type of financing so as to gain an equity stake by investing in a new company. The purpose behind investing in such risky projects is to gain returns on their investments, when the company starts progressing. 

Investors can invest in venture capital after the occurrence of the first phase of seed funding. Series A round refers to the very first round of institutional venture capital created for the purpose of funding growth. Venture capitalists prefer earning a return on their investment made, and can further opt for exit strategy, like the firm issuing shares to general public through an IPO, or merging and acquiring the company.

Venture Capital Funding vs. Debt or Loan Financing

Besides angel investing, and several other seed funding alternatives, venture capital works the best for companies that are quite new to the business, or are not financially strong to raise funds from the public. Because of unimpressive operating background, it becomes difficult for these companies to borrow huge loans from banks or financial institutions.

Venture capital funding vs debt/loan financing

Arranging funds from venture capital is totally different from borrowing a loan. When banks lend money to companies, they reserve the right of getting their loans as well as the interest thereon back in a given period of time, no matter if the company is in profits or losses. However, the funding of venture capital takes place in exchange for a stake in business equity, and doesn't offer any protection to the investor. He or she will receive returns only if the business operations are successful and profitable in the coming months or years.