The Basics of Venture Capital
The VC industry follows the power-law curve, with the top firms creating the greatest wealth. The rest of us float our money around the long tail, hoping to make a profit. Listed below are some of the common terms associated with Venture Capital investments. What’s the difference between a successful VC fund and a bust one? We’ll answer those questions later. But first, let’s look at the basics.
The definition of venture capital is a fund that invests in high-growth startups. This type of fund takes money from its Limited Partners and makes investments through capital calls. It reserves three or four times its initial investment in the company. The goal of the fund is to work with the founder entrepreneur to grow the business. This is often the most difficult part of the venture-capital process, but the rewards can be great. The money is often invested in start-ups.
The first big fundraising year for venture capital was 1978, when investors raised $750 million. While the Employee Retirement Income Security Act (ERISA) initially prohibited many types of private company investments, in 1978, the US Labor Department relaxed this rule and allowed corporate pension funds to invest in private companies. Since then, corporate pension funds have been a major source of funding for venture capitalists. Angel investors and other sources of seed funding are also common. In recent years, equity crowdfunding has become an increasingly popular option.
The structure of capital markets is a big part of what makes venture capital so attractive. New businesses often have a unique concept that other institutions have no way to finance. A bank can charge a higher rate of interest, but a start-up can typically justify a higher interest rate. Many businesses today lack the hard assets to back their ideas, so Venture Capital is the best option for them. This is why Venture Funds are so valuable.
While the VC industry started as a private equity investment, most businesses are actually funded by universities and corporations. VC funds invest in innovative startups, and often require a seat on the board for the investors. But when companies are ready to raise capital, they must first identify the opportunity and the market. Then, they must determine the target market. This is where Venture Capital comes in. While the VC firm will then do their due diligence, the business will still need its own team and staff, so that it can operate efficiently.
The most common form of Venture Capital is a combination of private equity investments by large institutions. These investments are made by professional money managers who invest other people’s money in startups. VC funds are also classified by the stage of a company’s growth. In its early stages, the funds are used to build a product and expand its market. This financing can be either an expansion round or a bridge financing. If it is a startup, it can increase its market size and attract new investors.