Venture capital investment firms can provide the seed money for high-risk, start-up companies. People called venture capitalists run these firms, and make the investment decisions. Besides money, venture capitalists can also provide support through advice, human resource management and even office space for a business they invest in.
Because of the high failure rate for most start-up businesses, venture capitalists command a high rate of return for their investment. So what do entrepreneurs pay venture capitalists for receiving their investment? It’s typically a piece of the start-up company, in the form of stock ownership. In addition, venture capitalists often receive a seat on the company’s board of directors.
Then how do venture capitalists get entrepreneurs to willingly give up part of their companies, as well as some control over business decisions? Why not just go to a bank for a loan? The answer is: because venture capitalists have money and they’re willing to spend it. Conventional banks frequently shun loans to new businesses because, as mentioned earlier, these companies tend to have a high rate of failure. In addition, their owners usually lack loan collateral. So getting money from a venture capitalist is frequently the only way an entrepreneur can fund the business’s growth.
In the end, the venture capitalists' goal is for the business to achieve success. This could lead to the business having a public offering of its stock, which in turn would make the shareholding venture capitalist, and the company founders, a lot of money. Some venture capitalist firms are even public themselves, and are included in some exchanges. This can provide an avenue for regular investors to also invest in ideas from entrepreneurs.