That Venture Capital Trade -- A Market

Venture capital is money supplied by professionals who invest alongside management in young, rapidly growing companies which have the potential to produce 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 buy small percentage of the businesses they review and have a long-term perspective Scout Ventures . In the years ahead, they actively work with the company's management by contributing their experience and business savvy gained from helping other programs with similar growth challenges.

Venture capitalists mitigate the chance of venture investing by developing 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 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 examples of companies that received venture capital early in 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 the main institutional and corporate investment portfolio. Recently, some investors have already 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 simply to 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 balance coming from endowments, foundations, insurance companies, banks, individuals and other entities who seek to diversify their portfolio with this investment class.

What is a Venture Capitalist?

The typical person-on-the-street depiction of a venture capitalist is that of a wealthy financier who would like to fund start-up companies. The perception is that someone who develops a brand new change-the-world invention needs capital; thus, should they can't get capital from the bank or from their very own pockets, they enlist assistance from a venture capitalist.

In truth, venture capital and private equity firms are pools of capital, typically organized as a small partnership, that invests in companies that represent the ability for a higher level of return within five to seven years. The venture capitalist may look at several hundred investment opportunities before investing in just a few selected companies with favorable investment opportunities. Not even close to 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 the early 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 current venture firm emerged since the dominant venture investment vehicle. However, within the last several 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 a company and provide needed capital and expertise to simply help develop companies. Angel investors may either be wealthy people with management expertise or retired business men and women who seek the ability 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 may be specialists in 1 or 2 industry sectors, or may seek to invest in only a localized geographic area.

Not totally all venture capitalists invest in "start-ups." While venture firms will invest in companies that are in their initial start-up modes, venture capitalists will also invest in companies at various stages of the business life cycle. A venture capitalist may invest before there is a genuine 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 referred to as "early stage investing." Also, the venture capitalist may provide needed financing to simply help a company grow beyond a critical mass to be much more successful ("expansion stage financing").

The venture capitalist may buy company through the entire company's life cycle and therefore some funds give attention to later stage investing by providing financing to simply help the company grow to a critical mass to attract public financing through an investment offering. Alternatively, the venture capitalist will help the company 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 companies that represent favorable investment opportunities. You can find venture funds that will be broadly diversified and will invest in companies in several industry sectors as diverse as semiconductors, software, retailing and restaurants and others that may be specialists in mere one technology.

While high technology investment makes up all 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 numerous firms which have specialized in retail company investment and others which have a focus in investing only in "socially responsible" start-up endeavors.

Venture firms come 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 most popular denominator in many of these types of venture investing is that the venture capitalist isn't an inactive investor, but has an energetic and vested fascination with guiding, leading and growing the companies they have 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 different companies they have committed to; for instance 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.