Venture capital is money supplied by experts who invest alongside management in young, rapidly growing companies which have the potential to produce into significant economic contributors. Venture capital is an important supply of equity for start-up companies cos è una startup.
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.
Venture capitalists generally:
- Finance new and rapidly growing companies;
- Purchase equity securities;
- Assist in the development of 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 contemplating 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. Moving forward, they actively use the company's management by contributing their experience and business savvy gained from helping other companies with similar growth challenges.
Venture capitalists mitigate the risk of venture investing by developing a portfolio of young companies within a venture fund. Often times they will co-invest with other professional venture capital firms. Furthermore, 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 for example Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genentech are famous types of firms 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 popular asset class that's a practical and significant area of the institutional and corporate investment portfolio. Recently, some investors have already been talking about 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.
Regardless, an institutional investor will allocate 2% to 3% of their institutional portfolio for investment in alternative assets such as for example private equity or venture capital included in their overall asset allocation. Currently, over 50% of investments in venture capital/private equity originates from institutional public and private pension funds, with the total amount coming from endowments, foundations, insurance companies, banks, individuals and other entities who seek to diversify their portfolio with this investment class.
What is 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 an individual 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 fact, venture capital and private equity firms are pools of capital, typically organized as a restricted partnership, that invests in firms 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 purchasing only some selected companies with favorable investment opportunities. Far from 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 might 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 type of individual investment didn't totally disappear, the modern venture firm emerged while the dominant venture investment vehicle. However, in the last few years, individuals have again become a potent and increasingly larger area of the early stage start-up venture life cycle. These "angel investors" will mentor an organization and provide needed capital and expertise to greatly 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.
Investment Focus
Venture capitalists might be generalist or specialist investors depending on their investment strategy. Venture capitalists may be generalists, purchasing various industry sectors, or various geographic locations, or various stages of a company's life. Alternatively, they could be specialists in a couple of industry sectors, or may seek to buy just a localized geographic area.
Not absolutely all venture capitalists spend money on "start-ups." While venture firms will spend money on companies which are inside their initial start-up modes, venture capitalists may also spend money on companies at various stages of the business life cycle. A venture capitalist may invest before there's an actual product or company organized (so called "seed investing"), or may provide capital to start up an organization in its first or second stages of development called "early stage investing." Also, the venture capitalist may provide needed financing to greatly help an organization grow beyond a vital mass to be much more successful ("expansion stage financing").
The venture capitalist may choose company throughout the company's life cycle and therefore some funds give attention to later stage investing by giving financing to greatly help the organization grow to a vital mass to attract public financing through an inventory offering. Alternatively, the venture capitalist will help the organization attract a merger or acquisition with another company by giving liquidity and exit for the company's founders.
At another end of the spectrum, some venture funds specialize in the acquisition, turnaround or recapitalization of public and private firms that represent favorable investment opportunities.
There are venture funds which is 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 only one technology.
While high technology investment comprises most of the venture purchasing 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 for example construction, industrial products, business services, etc. There are numerous 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 can be found in various sizes from small seed specialist firms of only some million dollars under management to firms with over a thousand dollars in invested capital around the world. The normal denominator in many of these types of venture investing is that the venture capitalist isn't an inactive investor, but has an active and vested interest in guiding, leading and growing the companies they have invested in. They seek to include value through their experience in purchasing tens and a huge selection of companies.
Some venture firms are successful by creating synergies between the different companies they have dedicated to; for instance one company that has a great software product, but does not need adequate distribution technology might be paired with another company or its management in the venture portfolio that has better distribution technology.
Amount of Investment
Venture capitalists can help companies grow, nevertheless they eventually seek to exit the investment in three to seven years. An earlier stage investment make take seven to a decade to mature, while a later stage investment many just 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 made with careful diligence and expertise.
Kinds of Firms
There are numerous types 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 typical type 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 with respect to outside investors or the parent firm's clients. Still other firms might be subsidiaries of non-financial, industrial corporations making investments with respect to the parent itself. These latter firms are usually called "direct investors" or "corporate venture investors."
Other organizations may include government affiliated investment programs that help start up companies either through state, local or federal programs. One common vehicle could be 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.
While the predominant form of organization could be the limited partnership, in recent years the tax code has allowed the synthesis of either Limited Liability Partnerships, ("LLPs"), or Limited Liability Companies ("LLCs"), as alternative forms of organization. However, the limited partnership remains the predominant organizational form. The advantages and disadvantages of every has to do with liability, taxation issues and management responsibility.
The venture capital firm will organize its partnership as a pooled fund; that's, a fund comprised of the typical partner and the investors or limited partners. These funds are usually organized as fixed life partnerships, usually having a life of ten years cos è una startup. Each fund is capitalized by commitments of capital from the limited partners. When the partnership has reached its target size, the partnership is closed to help investment from new investors or even existing investors and so the fund features a fixed capital pool that to create its investments.
