What is Venture Capital

Venture capital is an important source of funding fortake Board of Director positions at a portfolio
start-up and other companies that have a limitedcompany. They may also help recruit key executives
operating history and don't have access to capitalto the portfolio company.
markets. A venture capital firm (VC) typically looksSize of Funding:
for new and small businesses with a perceivedIt's important to do your homework before
long-term growth potential that will result in a largeapproaching a VC for funding, to make sure you're
payout for investors.targeting the right potential partner for your business
Who is a Venture Capitalist?needs. Not all VCs invest in 'start-ups.' While some
A venture capitalist is not necessarily just onemay invest small amounts of "seed" capital for very
wealthy financier. Most VCs are limited partnershipsearly ventures, many focus on early or expansion
that have a fund of pooled investment capital withfunding, while still others may invest at the end of
which to invest in a number of companies. They varythe business cycle, specializing in buyouts,
in size from firms that manage just a few millionturnarounds, or recapitalizations.
dollars worth of investments to much larger VCs thatInvestment Preferences:
may have billions of dollars invested in companies allVCs may be generalists that invest in a variety of
over the world. VCs may be a small group ofindustries and locations. More typically, they specialize
investors or an affiliate or subsidiary of a largein a particular industry. Make sure your company falls
commercial bank, investment bank, or insurancewithin the VC's target industry before you make
company that makes investments on behalf clientsyour pitch - a VC that's focused on biotechnology
of the parent company or outside investors. In anystart-ups will not consider your request for
case, the VC aims to use its business knowledge,later-stage funding for expansion of your
experience and expertise to fund and nurturesemiconductor firm. You can often gain insight into a
companies that will yield a substantial return on theVC's investment preferences by reviewing its
VC's investment, generally within three to sevenwebsite.
years.In addition to industry preferences, VCs also typically
Returns for Investors:have a geographic preference. Being in the same
Not all VC investments pay off. The failure rate cangeneral location as a portfolio company allows the VC
be quite high, and in fact, anywhere from 20 percentto better assist with business operations such as
to 90 percent of portfolio companies may fail tomarketing, personnel, and financing.
return on the VC's investment. On the other hand, ifKeep in mind that venture capital is not an option for
a VC does well, a fund can offer returns of 300 toall new businesses. In fact, VCs are very selective in
1,000 percent.choosing new companies to invest in, so your
Partnership:company may not qualify. They're most interested in
In additional to a portion of the equity, a VC expectsbusinesses with high growth potential that will allow
to have a say in how its portfolio company operates.them to successfully exit with a higher than average
Ideally, the VC fosters growth at the companyreturn in a time frame of roughly three to 10 years,
through its involvement in managerial, strategic, anddepending on the type of investment. Given the
planning decisions. To do this, the VC relies on therigorous expectations, most venture funding goes to
expertise of its general partners who may be formercompanies in rapidly expanding industries such as
CEOs, bankers, or experts in a particular industry. Intechnology, biotechnology, and life sciences.
most cases, one or more general partners of the VC