Venture capital is money given by experts who invest alongside management in young, rapidly growing companies that have the potential to produce into significant economic contributors. Venture capital is a significant supply of equity for start-up companies. Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.
When it comes to an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only choose small percentage of the businesses they review and have a long-term perspective. In the years ahead, they actively use the company's management by contributing their experience and business savvy gained from helping other programs with similar growth challenges.
Venture capitalists mitigate the danger of venture investing by having a portfolio of young companies in a single venture fund. Many times they will co-invest with other professional venture capital firms. In addition, many venture partnership will manage multiple funds simultaneously. For decades, venture capitalists have nurtured the growth of America's high technology and entrepreneurial communities resulting in significant job creation, economic growth and international competitiveness. Companies such as for instance Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genentech are famous examples of firms that received venture capital early within their development.
Private Equity Investing
Venture capital investing has grown from a small investment pool in the 1960s and early 1970s to a popular asset class that's a viable and significant area of the institutional and corporate investment portfolio. Recently, some investors have now been talking about venture investing and buyout investing as "private equity investing." This term can be confusing because some in the investment industry use the term "private equity" to refer only to buyout fund investing.
Regardless, an institutional investor will allocate 2% to 3% of the institutional portfolio for investment in alternative assets such as for instance private equity or venture capital as part of their overall asset allocation. Currently, over 50% of investments in venture capital/private equity originates from institutional public and private pension funds, with the balance via endowments, foundations, insurance companies, banks, individuals and other entities who seek to diversify their portfolio with this investment class.
What's a Venture Capitalist?
The normal person-on-the-street depiction of a venture capitalist is that of a rich financier who wants to fund start-up companies. The perception is that a person who develops a brand new change-the-world invention needs capital; thus, when they can't get capital from a bank or from their own pockets, they enlist the aid of a venture capitalist.
In reality, venture capital and private equity firms are pools of capital, typically organized as a restricted partnership, that invests in firms that represent the ability for a high rate of return within five to seven years. The venture capitalist may look at several hundred investment opportunities before purchasing only some selected companies with favorable investment opportunities. Definately not being simply passive financiers, venture capitalists foster growth in companies through their involvement in the management, strategic marketing and planning of the investee companies. They are entrepreneurs first and financiers second.
Even individuals may be venture capitalists. In the first days of venture capital investment, in the 1950s and 1960s, individual investors were the archetypal venture investor. While this kind of individual investment didn't totally disappear, the present day venture firm emerged whilst the dominant venture investment vehicle. However, within the last few couple of years, individuals have again turn into a potent and increasingly larger area of the early stage start-up venture life cycle. These "angel investors" will mentor a company and provide needed capital and expertise to simply help develop companies. Angel investors may either be wealthy people who have management expertise or retired business men and women who seek the ability for first-hand business development.
Investment Focus
Venture capitalists may be generalist or specialist investors depending on their investment strategy. Venture capitalists can be generalists, purchasing various industry sectors, or various geographic locations, or various stages of a company's life. Alternatively, they may be specialists in a couple of industry sectors, or may seek to buy only a localized geographic area.
Not absolutely all venture capitalists purchase "start-ups." While venture firms will purchase companies that are within their initial start-up modes, venture capitalists may also purchase companies at various stages of the company life cycle. A venture capitalist may invest before there is a real product or company organized (so called "seed investing"), or may provide capital to start up a company in its first or second stages of development called "early stage investing." Also, the venture capitalist may provide needed financing to simply help a company grow beyond a crucial mass to are more successful ("expansion stage financing").
The venture capitalist may choose company through the entire company's life cycle and therefore some funds give attention to later stage investing by giving financing to simply help the organization grow to a crucial mass to attract public financing through a share offering. Alternatively, the venture capitalist will help the organization attract a merger or acquisition with another company by giving liquidity and exit for the company's founders.
At one other end of the spectrum, some venture funds specialize in the acquisition, turnaround or recapitalization of public and private firms that represent favorable investment opportunities Scout Ventures. There are venture funds that will be broadly diversified and will purchase companies in a variety of industry sectors as diverse as semiconductors, software, retailing and restaurants and others that may be specialists in just one technology.
While high technology investment comprises a lot of the venture purchasing the U.S., and the venture industry gets plenty of attention because of its high technology investments, venture capitalists also purchase companies such as for instance construction, industrial products, business services, etc. There are many firms that have specialized in retail company investment and others that have a focus in investing only in "socially responsible" start-up endeavors.
Venture firms can be found in various sizes from small seed specialist firms of only some million dollars under management to firms with over a thousand dollars in invested capital around the world. The common denominator in most of these forms of venture investing is that the venture capitalist is not an inactive investor, but has an active and vested fascination with guiding, leading and growing the businesses they've invested in. They seek to incorporate value through their experience in purchasing tens and countless companies. Some venture firms are successful by creating synergies between the different companies they've dedicated to; for example one company that has a great software product, but does not need adequate distribution technology may be paired with another company or its management in the venture portfolio that has better distribution technology.
