Succeeding in venture capital is a high-stakes game with incredible returns and massive losses possibilities. So any new venture capitalist needs to understand the key differences that separate conventional forms of financial investing and venture investment for a successful investment and ensure their money is well spent. Venture capitalists can get high returns if they figure out the right venture. Knowing what to expect is critical if you’re new and want to break into this type of investment. This guide provides an overview of what venture capital entails and how it works.
Venture Capital – What it is
Commonly referred to as VC, Venture capital is the kind of financing investors provide to small companies and entrepreneurs with exceptional growth potential.
These companies want to go public but need capital to make this possible in most cases. Well-off individuals, financial institutions, and investment banks are typically the leading players in this field.
Apart from funds, VCs can partner through a mentor-type role by providing technical or managerial expertise to the startup teams.
So how does venture capital work?
Venture capital focuses on emerging companies
Venture capital is becoming an increasingly popular way of raising funds for new ventures with short operating histories or are small in size. As an investor, you’ll typically get equity in the company and often have a say in the company decisions.
One key difference between private equity and venture capital is that the latter focuses on startup companies that need first-time funding. Private equity often focuses on more prominent and perhaps well established companies whose company founders seek to transfer some ownership stakes.
Venture capital is not long-term
A good amount of money goes to the infrastructure of a business. This includes fixed assets, working capital, and marketing. The idea is to invest in a company’s infrastructure until it’s sustainable enough for public equity markets to provide liquidity. A venture capitalist will buy a stake in an established idea, nurture it, and exit once it gains credibility and size.
Venture capital investing doesn’t guarantee short-term payouts
Unlike most publicly market traded investments, there is a structural time lag between your initial investments and the final returns. This lagging typically increases the liquidity risk.
For instance, it’s easy to place an order and get a buyer with publicly-traded funds and stock. VCs investments often provide relatively high returns to make up for the immoderate liquidity risk.
Again, long-term returns from venture capital investments largely depend on how successful an Initial Public Offer(IPO) is. You might need years to receive your principal returns. But this is an excellent venture for those that want to invest a small portion of their portfolio in high-risk, high-return assets.
Do your research and understand the risks for any venture capitalist ready to plunge into funding startups. Unlike investing in publicly traded investments where you have a share in a highly vetted firm, venture capital investments invest in small businesses and startups with great potential.
