A:

Venture capital comes from investment banks, wealthy investors and other financial institutions that support venture investment. These parties are collectively known as venture capitalists.

Venture capital is attractive to start-up companies with high potential for growth. These companies are usually not large enough to obtain meaningful funds from equity financing. The companies may not have enough history or collateral to qualify for a bank loan large enough to cover their needs. In such cases, venture capital is the best option. For a company to qualify for venture capital, it needs to have high potential for growth. This potential promises venture capitalists that there might be returns for their investments.

The investors run the risk of losing large amounts of money if the companies do not grow as intended. For running this risk, they are rewarded with the power to be part of the decision-making process in the companies. They also own equity in the companies. While these privileges are a plus for the investors, they are a disadvantage for the company owners.

Venture capital allows people with great ideas to turn them into sources of income. The result is the creation of jobs for those who are qualified to fill them. Venture-backed companies also contribute to the growth of the economy due to their contribution to the gross domestic product (GDP) of a country.

Most venture capitalists prefer to pool their investments and invest in different start-ups. This way, the risk of losing everything for an individual investor is greatly minimized. Similar funding options for start-ups include seed funding, equity crowd funding and angel investment.

RELATED FAQS
  1. What is the best form of equity financing for a start-up company?

    Learn the equity financing options available to small business, and understand the best equity options for companies during ... Read Answer >>
  2. What type of funding options are available to a private company?

    Understand how private companies can obtain financing for startup, growth or expansion projects, and learn how this differs ... Read Answer >>
  3. Do joint ventures need an exit strategy?

    Understand why an exit strategy is important for a business partnership such as a joint venture, and learn the options partners ... Read Answer >>
  4. What is the difference between the equity method and the proportional consolidation ...

    Discover the differences between the equity method and the proportional consolidation method of joint venture accounting, ... Read Answer >>
Related Articles
  1. Financial Advisor

    A How-To Guide to Being a Venture Capitalist

    So, you want to be a venture capitalist? Here's what it takes (besides capital).
  2. Small Business

    Who are Venture Capitalists?

    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.
  3. Investing

    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 ...
  4. Small Business

    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.
  5. Small Business

    How Venture Capital Will Change in 2016

    Venture capitalists face a tech bubble on the horizon, along with an influx of new non-traditional investors via Wall Street and crowdfunding platforms.
  6. Tech

    The Risk And Rewards Of Investing In Startups (GOOG)

    Investing in startups is a very risky business but can reward investors greatly if and when they do pay off.
  7. Investing

    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.
  8. Small Business

    What does Joint Venture Mean?

    In a typical joint venture, two or more businesses agree to contribute capital and resources for a common project. Most often, that project produces something that earns revenue.
  9. Investing

    Be Your Own Venture Capitalist With These Stocks

    By doing some digging, there are ways for the average joe to become his/her own venture capital fund.
  10. Small Business

    Startups That Got Screwed by Venture Capital

    Venture capital support can make or break a startup. But before taking the cash, founders should make sure they are not making a deal with the devil.
RELATED TERMS
  1. Venture Capital

    Venture Capital is money provided by investors to startup firms ...
  2. Adventure Capitalist

    An adventure capitalist is an investor who backs higher risk ...
  3. Diluted Founders

    A slang term often used by venture capitalists to describe the ...
  4. Venture Capital Trust - VCT

    A type of publicly listed closed-end fund found in the United ...
  5. Pledge Fund

    A pledge fund is a limited partnership which allows for opportunistic ...
  6. Liquidation Preference

    A term used in venture capital contracts to specify which investors ...
Hot Definitions
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  6. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
Trading Center