Venture capital is money provided 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 source 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 choose 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 risk 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 many years, 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 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 tiny investment pool in the 1960s and early 1970s to a main-stream asset class that’s a viable and significant part of the institutional and corporate investment portfolio. Recently, some investors have now been referring to venture investing and buyout investing as “private equity investing.” This term may be confusing because some in the investment industry utilize the term “private equity” to refer simply to buyout fund investing.
Whatever the case, an institutional investor will allocate 2% to 3% of their institutional portfolio for investment in alternative assets such as private equity or venture capital as part of their overall asset allocation. Currently, over 50% of investments in venture capital/private equity originates from institutional public and private pension funds, with the balance via endowments, foundations, insurance companies, banks, individuals and other entities who seek to diversify their portfolio with this particular investment class.
What’s a Venture Capitalist?
The conventional person-on-the-street depiction of a venture capitalist is that of a rich financier who would like to fund start-up companies. The perception is that a person who develops a whole new change-the-world invention needs capital; thus, when they can’t get capital from a bank or from their particular pockets, they enlist assistance from a venture capitalist.
In truth, 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 high rate of return within five to seven years. The venture capitalist may look at several hundred investment opportunities before buying 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 their investee companies. They are entrepreneurs first and financiers second.
Even individuals may be venture capitalists. In the first days of venture capital investment, in the 1950s and 1960s, individual investors were the archetypal venture investor. While this sort of individual investment did not totally disappear, the modern venture firm emerged since the dominant venture investment vehicle. However, within the last few couple of years, individuals have again develop into a potent and increasingly larger part of the 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 who have management expertise or retired business men and women who seek the chance for first-hand business development.
Venture capitalists may be generalist or specialist investors depending on their investment strategy. Venture capitalists may be generalists, buying various industry sectors, or various geographic locations, or various stages of a company’s life. Alternatively, they may be specialists in a couple of industry sectors, or may seek to invest in only a localized geographic area.
Not all venture capitalists purchase “start-ups.” While venture firms will purchase companies which are inside their initial start-up modes, venture capitalists will also purchase companies at various stages of the company 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 launch a company in its first or second stages of development known as “early stage investing.” Also, the venture capitalist may provide needed financing to simply help a company grow beyond a crucial mass to become more successful (“expansion stage financing”).
The venture capitalist may choose 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 crucial mass to attract public financing through a share offering Scout Ventures. Alternatively, the venture capitalist could 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. There are venture funds that’ll be broadly diversified and will purchase companies in various industry sectors as diverse as semiconductors, software, retailing and restaurants and others that may be specialists in only one technology.
While high technology investment makes up a lot of the venture buying the U.S., and the venture industry gets lots of attention for its high technology investments, venture capitalists also purchase companies such as 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 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 round the world. The most popular denominator in many of these forms of venture investing is that the venture capitalist is not a passive investor, but has an active and vested curiosity about guiding, leading and growing the companies they’ve invested in. They seek to incorporate value through their experience in buying tens and hundreds of companies. Some venture firms are successful by creating synergies between the various companies they’ve invested in; for example one company that’s a good software product, but does not need adequate distribution technology may be paired with another company or its management in the venture portfolio that’s better distribution technology.