Venture capital is money supplied by professionals who invest alongside management in young, rapidly growing companies that have the potential to produce into significant economic contributors. Venture capital is an essential source 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 considering an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only buy 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 individuals with similar growth challenges.
Venture capitalists mitigate the danger of venture investing by creating a portfolio of young companies in one venture fund. Often they will co-invest with other professional venture capital firms. Additionally, many venture partnership will manage multiple funds simultaneously. For many years, venture capitalists have nurtured the growth of America's high technology and entrepreneurial communities leading to 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 samples of firms that received venture capital early inside their development.
Private Equity Investing
Venture capital investing has grown from a small investment pool in the 1960s and early 1970s to a conventional asset class that is a feasible and significant the main institutional and corporate investment portfolio. Recently, some investors have been talking about venture investing and buyout investing as "private equity investing." This term could 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 their institutional portfolio for investment in alternative assets such as for instance private equity or venture capital included in their overall asset allocation. Currently, over 50% of investments in venture capital/private equity arises from institutional public and private pension funds, with the total amount via endowments, foundations, insurance companies, banks, individuals and other entities who seek to diversify their portfolio with this particular investment class.
What is 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 someone who develops a whole new change-the-world invention needs capital; thus, when they can't get capital from a bank or from their very own pockets, they enlist the help of a venture capitalist.
In truth, venture capital and private equity firms are pools of capital, typically organized as a small partnership, that invests in firms that represent the opportunity for a higher rate of return within five to seven years. The venture capitalist may look at several hundred investment opportunities before purchasing just a few 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 their investee companies. They're entrepreneurs first and financiers second.
Even individuals may be venture capitalists. In early days of venture capital investment, in the 1950s and 1960s, individual investors were the archetypal venture investor. While this type of individual investment didn't totally disappear, the modern venture firm emerged while the dominant venture investment vehicle. However, in the last several years, individuals have again become a potent and increasingly larger the main early stage start-up venture life cycle. These "angel investors" will mentor a company and provide needed capital and expertise to greatly help develop companies. Angel investors may either be wealthy individuals with management expertise or retired business men and women who seek the opportunity for first-hand business development.
Investment Focus
Venture capitalists may be generalist or specialist investors depending on the investment strategy. Venture capitalists could be generalists, purchasing various industry sectors, or various geographic locations, or various stages of a company's life. Alternatively, they could be specialists in one or two industry sectors, or may seek to purchase only a localized geographic area.
Not totally all venture capitalists spend money on "start-ups." While venture firms will spend money on companies which can be inside their initial start-up modes, venture capitalists may also spend money on companies at various stages of the business enterprise 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 greatly help a company grow beyond a vital mass to be successful ("expansion stage financing").
The venture capitalist may buy company through the entire company's life cycle and therefore some funds concentrate on later stage investing by providing financing to greatly help the organization grow to a vital mass to attract public financing through a share offering Scout Ventures. Alternatively, the venture capitalist can help the organization attract a merger or acquisition with another company by providing liquidity and exit for the company's founders.
At the 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. You will find venture funds that'll be broadly diversified and will spend money on companies in several industry sectors as diverse as semiconductors, software, retailing and restaurants and others that could be specialists in only one technology.
While high technology investment makes up the majority of the venture purchasing the U.S., and the venture industry gets a lot of attention for the high technology investments, venture capitalists also spend money on companies such as for instance construction, industrial products, business services, etc. There are numerous firms that have specialized in retail company investment and others that have an emphasis in investing only in "socially responsible" start-up endeavors.
Venture firms can be found in various sizes from small seed specialist firms of just a few million dollars under management to firms with over a thousand dollars in invested capital around the world. The common denominator in many of these types of venture investing is that the venture capitalist isn't an inactive investor, but has an active and vested fascination with guiding, leading and growing the companies they have invested in. They seek to add value through their experience in purchasing tens and a huge selection of companies. Some venture firms are successful by creating synergies between the different companies they have committed to; as an example one company that's 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's better distribution technology.
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