Venture capital is money provided by experts who invest alongside management in young, rapidly growing companies that 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 incubatori startup.
Venture capitalists generally:
- Finance new and rapidly growing companies;
- Purchase equity securities;
- Assist in the development of new services or services;
- Add value to the organization through active participation;
- Take higher risks with the expectation of higher rewards;
- Have a long-term orientation
When it comes to 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. In the years ahead, they actively assist the company's management by contributing their experience and business savvy gained from helping other individuals with similar growth challenges.
Venture capitalists mitigate the danger of venture investing by having a portfolio of young companies within a venture fund. Often they'll 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 resulting in 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 types of companies that received venture capital early within their development.
Private Equity Investing
Venture capital investing has grown from a small investment pool in the 1960s and early 1970s to a main-stream asset class that is a practical and significant the main institutional and corporate investment portfolio. Recently, some investors have been discussing venture investing and buyout investing as "private equity investing." This term could be confusing because some in the investment industry utilize the term "private equity" to refer only to buyout fund investing.
In any case, an institutional investor will allocate 2% to 3% of these 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 arises 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's a Venture Capitalist?
The normal 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 fresh change-the-world invention needs capital; thus, should they can't get capital from a bank or from their own pockets, they enlist assistance from a venture capitalist.
In reality, 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 buying only a few selected companies with favorable investment opportunities. Definately not being simply passive financiers, venture capitalists foster growth in companies through their involvement in the management, strategic marketing and planning of these investee companies. They're entrepreneurs first and financiers second.
Even individuals may be venture capitalists. In early days of venture capital investment, in the 1950s and 1960s, individual investors were the archetypal venture investor. While this type of individual investment did not totally disappear, the modern venture firm emerged since the dominant venture investment vehicle. However, within the last few 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 an organization and provide needed capital and expertise to help develop companies. Angel investors may either be wealthy individuals with management expertise or retired business men and women who seek the ability for first-hand business development.
Investment Focus
Venture capitalists may be generalist or specialist investors depending on their investment strategy. Venture capitalists could be generalists, buying various industry sectors, or various geographic locations, or various stages of a company's life. Alternatively, they may be specialists in one or two industry sectors, or may seek to purchase only a localized geographic area.
Not totally all venture capitalists spend money on "start-ups." While venture firms will spend money on companies which are within their initial start-up modes, venture capitalists may also spend money on companies at various stages of the company life cycle. A venture capitalist may invest before there is an actual product or company organized (so called "seed investing"), or may provide capital to launch an organization in its first or second stages of development referred to as "early stage investing." Also, the venture capitalist may provide needed financing to help an organization grow beyond a vital mass to be more successful ("expansion stage financing").
The venture capitalist may choose company throughout the company's life cycle and therefore some funds focus on later stage investing by giving financing to help the organization grow to a vital mass to attract public financing through a stock offering. Alternatively, the venture capitalist can help the organization attract a merger or acquisition with another company by giving liquidity and exit for the company's founders.
At one 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 which will be broadly diversified and will spend money on companies in several industry sectors as diverse as semiconductors, software, retailing and restaurants and others that may be specialists in just one technology.
While high technology investment comprises all the venture buying the U.S., and the venture industry gets lots of attention for the high technology investments, venture capitalists also spend money on companies such as construction, industrial products, business services, etc. There are many firms that have specialized in retail company investment and others that have an emphasis in investing only in "socially responsible" start-up endeavors.
Venture firms can be found in various sizes from small seed specialist firms of only a few million dollars under management to firms with over a billion dollars in invested capital across the world. The common denominator in most of these kinds of venture investing is that the venture capitalist is not an inactive investor, but has an energetic and vested curiosity about guiding, leading and growing the companies they have invested in. They seek to include value through their experience in buying tens and countless companies.
Some venture firms are successful by creating synergies between the different companies they have dedicated to; like one company that has 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 has better distribution technology.
Period of Investment
Venture capitalists may help companies grow, but they eventually seek to exit the investment in three to seven years. An early on stage investment make take seven to a decade to mature, while a later stage investment many only take many years, and so the appetite for the investment life cycle must certanly be congruent with the limited partnerships' appetite for liquidity. The venture investment is neither a brief term nor a liquid investment, but an investment that really must be created using careful diligence and expertise.
Forms of Firms
There are many kinds of venture capital firms, but many mainstream firms invest their capital through funds organized as limited partnerships in that the venture capital firm serves as the typical partner. The most frequent kind of venture firm is an unbiased venture firm that has no affiliations with any financial institution. These are called "private independent firms" ;.Venture firms may also be affiliates or subsidiaries of a professional bank, investment bank or insurance company and make investments on behalf of outside investors or the parent firm's clients. Still other firms may be subsidiaries of non-financial, industrial corporations making investments on behalf of the parent itself. These latter firms are normally called "direct investors" or "corporate venture investors."
Other organizations may include government affiliated investment programs that help launch companies either through state, local or federal programs. One common vehicle is the Small Business Investment Company or SBIC program administered by the Small Business Administration, in which a venture capital firm may augment a unique funds with federal funds and leverage its investment in qualified investee companies.
As the predominant form of organization is the limited partnership, lately the tax code has allowed the formation of either Limited Liability Partnerships, ("LLPs"), or Limited Liability Companies ("LLCs"), as alternative kinds of organization. However, the limited partnership remains the predominant organizational form. The advantages and disadvantages of each has related to liability, taxation issues and management responsibility.
The venture capital firm will organize its partnership as a pooled fund; that is, a fund made up of the typical partner and the investors or limited partners. These funds are normally organized as fixed life partnerships, usually having a life of ten years. Each fund is capitalized by commitments of capital from the limited partners incubatori startup. Once the partnership has reached its target size, the partnership is closed to further investment from new investors as well as existing investors and so the fund includes a fixed capital pool from which to create its investments.