Who are Venture Capitalists?



Next video:
Loading the player...

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.

 

Related Articles
  1. Managing Wealth

    A Day in the Life of a Venture Capitalist

    Learn more about the job description of a venture capitalist and discover what a typical day in the life of this professional might look like.
  2. Managing Wealth

    Seek An Adventure In Venture Capital

    Make a career out of chasing down the "next big thing".
  3. Managing Wealth

    Startups Destroyed By Venture Capitalists

    While the title may sound counter-intuitive, venture capitalists have been responsible for causing or accelerating the downfall of their startups. Here are a couple of examples.
  4. Managing Wealth

    A Look Into The Secrets Of Venture Capitalism

    Venture capitalists own an equity stake in the start-up and have a say in the functioning of the company. Investments are generally made in early stages of a company with long term high growth ...
  5. Managing Wealth

    A Look into the Exciting World of Venture Capital

    We look into the world of venture capital, where deep-pocketed investors gamble on funding the next big startup (or the next big flop).
  6. Managing Wealth

    Does Your Startup Need Venture Capital Money?

    Venture capital funding provides capital to grow a business. However, entrepreneurs will also lose some control over business decisions.
  7. Managing Wealth

    A How-To Guide to Being a Venture Capitalist

    So, you want to be a venture capitalist? Here's what it takes (besides capital).
  8. Managing Wealth

    How Social Venture Capital Is Changing the World

    Learn what social venture capital is and the ways in which it differs from traditional venture capital. Identify two leading social venture capital firms.
  9. Markets

    Understanding Capitalist Economy Traits

    Capitalist economies share several traits.
  10. Managing Wealth

    Penny Stocks Vs. Venture Capital: Which Carries the Highest Risk?

    Learn how the challenges of venture capital investing and buying penny stocks differ and which type of investment carries the most risk.
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  5. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  6. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
Trading Center