Venture capitalists are individuals or companies that invest in business ventures, supplying capital to start-ups or expand. Most venture capital is provided by professionally managed companies. Venture capital firms are looking for higher returns than other investment vehicles such as the stock exchange.
Discover how venture capitalists operate, what types of business they invest in and some basic tips to help you find venture capitalist funding.
What is a venture capitalist?
Venture capitalists (VC) are defined by their large investments in promising startups and young businesses. Venture capitalists can work independently, but they are more likely to work with a venture firm that pools the money of its members.
Venture capital firms receive investment capital from pension plans, insurance companies, wealthy individuals, etc. The firm’s analysts decide which companies to invest in and receive management fees as compensation.
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They are a diverse group of companies, but have a lot of capital. This is what sets them apart from other investment groups, such as angels. They also take on new businesses and industries with a willingness to risk.
Venture capitalists don’t look for safe, stable companies. They want high growth potential, which means extra risk. According to one estimate, VCs usually aim to double their investment within seven years. 2
If they were satisfied with modest gains, venture capitalists would continue to invest in traditional investments such as blue-chip stocks or index funds. Venture capitalists take on significant risks by investing in new technologies, businesses, and industries. They do this to enjoy exponential returns. Venture capitalists typically invest in IT, biopharmaceuticals and clean technology.
- Acronym: VC
Venture Capitalists: How do they Work?
A venture capitalist’s investment is a type of equity funding. VC investors provide funding in exchange of taking equity in the company. Equity financing is usually used by businesses that are not established and cannot use debt funding such as loans.
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Businesses may not be able to access debt financing due to a lack of security or insufficient revenue. These are all issues that many new businesses face.
In exchange for providing funding, VC firms may obtain majority voting rights or special veto rights (either through obtaining a majority of the shares or a a data-component=”link” data-ordinal=”2″ data source=”inlineLink” and/or a a href=”https://www.liveabout.com/how-do I set up share classes for my new corporation-2948232>preferred class of shares/a>). In exchange for funding, VCs may receive special veto or majority voting rights (either by obtaining a class of preferred shares or a majority share). In the event of a stock sale, VCs can also stipulate priority rights.
There are other benefits to providing equity to venture capitalists than the cash injection. Many VCs have extensive business experience. Venture capital can help those who have a great idea but lack business experience.
Venture capitalists invest in companies for the long term. They will stick with a new business until its equity shares are worth something and it becomes public, or the company is purchased. At this stage, VCs usually leave the company. They have made a lot of money since they had invested in the startup when it was still a young company.
Venture capitalist funding: How to get it
It’s likely that the vast majority of companies won’t be able to secure venture capital financing, so it might be wise to explore alternative funding options before. VC firms are willing to take on risk, but they’re very selective about which businesses they choose.
You may have better odds of securing VC funding if you are past the startup phase and can show a viable service or product, but there is still a lot to do.
You need to attract the attention of VC firms if you decide venture capital is for you. Do whatever it takes to create momentum for your business. Recruit celebrities, win awards, or do anything else that will help you build momentum. You may be able attract venture capitalists with the right combination of promise, momentum, and story.
The Key Takeaways
- Venture capitalists, usually firms, are entities that invest in startups or businesses at the beginning of their expansion.
- Venture capitalists are different from other investors because they invest large amounts of money in order to achieve massive returns.
- Venture capital is a type of equity funding. In exchange for their investment, venture capitalists typically gain significant control over the company.
