Venture capital is money given by experts who invest alongside management in young, rapidly growing companies which have the potential to develop into significant economic contributors. Venture capital is an important 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 considering an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only invest in a small percentage of the businesses they review and have a long-term perspective. Going forward, they actively work with 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'll 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 causing 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 companies 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 mainstream asset class that is a practical and significant the main institutional and corporate investment portfolio. Recently, some investors have been referring to venture investing and buyout investing as "private equity investing." This term can be confusing because some in the investment industry utilize the term "private equity" to refer and then buyout fund investing.
In any case, 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 within their overall asset allocation. Currently, over 50% of investments in venture capital/private equity comes from institutional public and private pension funds, with the total amount coming from endowments, foundations, insurance companies, banks, individuals and other entities who seek to diversify their portfolio with this specific 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 whole new change-the-world invention needs capital; thus, should they can't get capital from a bank or from their own pockets, they enlist the help 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 companies that represent the chance for a higher level of return within five to seven years. The venture capitalist may look at several hundred investment opportunities before investing in 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 might be venture capitalists. In early days of venture capital investment, in the 1950s and 1960s, individual investors were the archetypal venture investor. While this kind of individual investment did not totally disappear, the current venture firm emerged because the dominant venture investment vehicle. However, within the last few couple of years, individuals have again turn into a potent and increasingly larger the main early stage start-up venture life cycle. These "angel investors" will mentor an organization 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 chance for first-hand business development.
Investment Focus
Venture capitalists might be generalist or specialist investors depending on the investment strategy. Venture capitalists can be generalists, investing in various industry sectors, or various geographic locations, or various stages of a company's life. Alternatively, they could be specialists in 1 or 2 industry sectors, or may seek to buy merely a localized geographic area.
Not absolutely all venture capitalists invest in "start-ups." While venture firms will invest in companies which are inside their initial start-up modes, venture capitalists will also invest in companies at various stages of the company life cycle
Scout Ventures. A venture capitalist may invest before there's a real product or company organized (so called "seed investing"), or may provide capital to launch an organization in its first or second stages of development called "early stage investing." Also, the venture capitalist may provide needed financing to simply help an organization grow beyond a critical mass to be much more successful ("expansion stage financing").
The venture capitalist may invest in a company throughout the company's life cycle and therefore some funds concentrate on later stage investing by giving financing to simply help the organization grow to a critical mass to attract public financing through a share offering. Alternatively, the venture capitalist may 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 companies that represent favorable investment opportunities. There are venture funds which is broadly diversified and will invest in companies in several industry sectors as diverse as semiconductors, software, retailing and restaurants and others that could be specialists in just one technology.
While high technology investment comprises most of the venture investing in the U.S., and the venture industry gets a lot of attention because of its high technology investments, venture capitalists also invest in companies such as for instance construction, industrial products, business services, etc. There are several firms which have specialized in retail company investment and others which 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 only some million dollars under management to firms with over a billion dollars in invested capital round the world. The common denominator in many of these kinds of venture investing is that the venture capitalist isn't a passive investor, but has a dynamic and vested interest in guiding, leading and growing the companies they've invested in. They seek to include value through their experience in investing in tens and hundreds of companies. Some venture firms are successful by creating synergies between the various companies they've committed to; as an example one company that's a good software product, but does not need adequate distribution technology might be paired with another company or its management in the venture portfolio that's better distribution technology.