Venture capital is a type of private capital financing, which is offered by venture capital funds or private equity firms to budding, mid-stage, and early-stage companies which are deemed to have medium or high potential for growth or that have shown early proof of success. Venture capital firms typically invest in the companies which they believe to have the most potential for growth and which can offer the most lucrative return for their investors. The idea behind the venture capital is that the initial investment by the venture capital firm is supposed to be offset against the expected future profits of the company. Therefore, during the early stages of a business venture, a significant portion of the funds raised from other investors will go towards the costs of operations, including staff, inventory and so on.
Venture capitalists play an active role in the day-to-day operations of ventures as well as in ensuring that adequate resources and finance are invested in order to make progress. A venture capital firm invests in new businesses that have not been thoroughly tested or which do not yet demonstrate sustainable growth in the areas in which they have chosen to invest. These firms are usually comprised of individual entrepreneurs with an entrepreneurial mindset. There is considerable risk associated with such investments as the stakes are relatively high and there is also great potential for substantial losses.
Private equity firms typically provide seed money to up-and-coming companies as a method of guaranteeing repayment of an initial investment by providing a line of credit. In the early days of venture capital investment, these loans were often issued by individual wealthy individuals who were willing to invest in the company on behalf of their fellow investors. In more recent times venture capitalists are often represented by investment banks with experience and expertise in assessing and guaranteeing good value for money.
Venture capitalists are particularly drawn to new businesses that meet a number of aggressive marketing strategies. These businesses need funding and may need to raise a large amount of capital to fund their operations and generate revenue in order to survive in the highly competitive market place. In order for new companies to attract venture capitalists, they must demonstrate significant potential. They must be able to demonstrate plans or strategies that point to the creation of a high volume, profitable company. They must also present prospects for future success that will exceed the costs involved in starting the company.
Venture capitalists will also seek to fund early-stage companies whose financial development prospects are less clear. These companies are generally younger companies that show an ability to attract and leverage the resources of other private funding sources. As well as providing a higher rate of return, the venture capital investors are also interested in funding levels being achieved sooner rather than later. That is why pension funds are increasingly providing investment vehicles that focus on early-stage companies.
The Venture Capitalist is typically a high net worth individual with a background in business or a respected financial institute. There are some well-known venture capitalists who started their careers as teachers or students. However, most investors prefer to have more direct ties to established institutions or wealthy individuals. An investment portfolio should contain only those types of companies that the investor believes has the ability to generate high returns. Also, an investor will want to diversify his or her investments to avoid becoming overly concentrated in just one or two types of companies. The best practice is to try to invest in several small but profitable companies rather than investing in a large number of medium or large size companies.
