Venture capital (VC) is a type of private equity used to fund early-stage, high-potential, high-risk, rapidly growing startup companies. Typically, venture capital is used for businesses with a new kind of technology or business model (in fields such as biotechnology and software) — and individuals or companies that provide venture capital hope to profit when the company is sold or engages in an IPO.
According to the National Venture Capital Association, 11% of private sector jobs come from venture backed companies, and venture backed revenue accounts for 21% of US GDP. Companies that have been funded by venture capital include Intel, Genentech, Facebook, Microsoft, Starbucks, and FedEx.
Why Choose Venture Capital?
Companies might look for venture capital financing because their companies have a limited operating history and are not quite ready for a traditional bank loan (which is why they’re considered high-risk). In exchange, venture capitalists are typically given a significant portion of the company’s ownership and control over company decisions.
Because the venture capitalist’s return is dependent on the growth and profitability of the business, venture capitalists become involved in several funding rounds in a company’s development: seed money, start-up, growth, second-round, expansion, and exit. Ideally, venture capitalists have experience with the type of business they choose to fund, and can both cultivate growth, and identify problems within a company.
Venture Capital Firms and Funds
A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors. These funds and firms can choose to operate locally or globally. Members of venture capital funds typically have technology backgrounds, business training, or deep industry experience.
Some venture capital firms invest in new ideas or fledgling companies, while others prefer to invest in established companies that require support before going public. In addition, some venture capital firms specialize in particular industries. Most venture capital funds have a fixed life of 10 years.