If you’re wondering what is venture capital, it is money provided to startup companies that show great promise in the eyes of the investors who are providing the funds. This investment is different than investing in the company’s stocks, because these are often investments in private companies. The company receiving the funds may be so small and new that it has not made an initial public offering.
Venture capital investments can be highly risky because the possibility for total loss is high. Venture capitalists accept this risk and hope for a substantial return if the company succeeds in making an IPO. These same investors sometimes provide other forms of assistance as well, such as management or operational expertise and advice.
Investors who provide venture capital are often individuals with a great deal of available investment money typically pooled from other investors. Venture capitalists are willing and able to risk large sums on high-risk investments that interest them for one reason or another. They might be passionate about the ideas that the company is developing, or they may simply believe that for any number of reasons that the startup will be wildly successful.
Sometimes small groups of venture capitalists join together to form venture capital funds that invest in a variety of startup companies under a professional investment strategy. These investment groups can function as partnerships with the companies they have invested in, steering them in the direction they see most likely to generate profit. These venture capital funds often attract investors with more modest financial backgrounds as limited partners, because they trust in the wisdom of the general partners, even if some of the specific investments are very risky. These limited partners may include insurance companies, pension funds, and various sorts of endowments and foundations.
There’s no doubt venture capital has played a significant role in the tech boom earlier this decade and has also helped propel the economy forward in many ways. Venture capital was hit hard by the 2008 financial crisis and bear market, but it has revived significantly since then. Plus, venture capitalists represent one of the best possible ways for small companies to acquire financial assistance now that banks are much more risk-averse and have more stringent requirements for loans.
Venture capitalists have come to the fore in funding numerous startups, ranging in industries from technology to biotech. When venture capital is correctly invested in a company that succeeds, the returns for investors can surpass 30% annually. This is a serious motive behind many such investments. As with such ventures in the past, these investments are often given to companies that represent a breakthrough in technology or in lifestyle. Many environmentally friendly startups that have high initial costs, such as solar-power companies or recycling technologies, depend on venture capitalists to help them achieve their goals.
Companies can find venture capitalists through business networks, both online and offline. There are several directories on the Internet that can act as matchmaking services between companies and interested investors. Additionally, networking at events and functions that are marketed toward venture capitalists can prove fruitful for startup companies as well.