A venture capital fund is a financial capital fund provided to early-stage, high growth potential startup companies by venture capital firms. Finance professionals manage the pool of venture capital funds on behalf of the investors. The venture capital fund is a pooled capital investment from institutions, corporates and individuals. Venture capital funding can also be provided to the startup companies by individuals directly. These professional investors are known as venture capitalists; who specialize in funding and building young, innovative enterprises. Venture capitalists are long-term investors who take a hands-on approach with all of their investments and actively work with entrepreneurial management teams in order to build great companies. Venture capitalists invest in private companies that have great potential for innovation and growth via the use of novel technology or business model. The common industries attracting venture capital funds (or investments) are biotechnology, IT services, software, wireless communications, medical devices, media and entertainment, clean technology, and internet networking.
Venture capital is attractive for new companies for the reasons – they have a limited operating history, are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. Hence, they raise venture capital funds for the initial setup. They also benefit from the strategic guidance received from the venture capital fund investors. The primary aim of a venture capitalist is to secure high rates of return. In exchange for the high risks borne by these capitalists, they enjoy part ownership of the startup. They get to exercise significant control over the company decisions, and they may also become Board of Directors of the startup. They usually invest in the industry where they have knowledge of and established industry contacts.
Most venture capital firms raise their funds from institutional investors, such as pension funds, insurance companies, endowments, foundations, family offices, and high net worth individuals. Since investment is mostly made in private companies, the venture capital funds earn profit through the operations of the company. Their investment is typically realized when the company goes public (IPO) or is merged/ purchased by another company (M&A).
Venture capitalists are different from private equity investors as they seek to create a long term relationship with the entrepreneur. Venture capitalists are long-term investors who take an active role in their portfolio companies. They not only provide the capital, but also provide great value through their management expertise. Venture capitalists guide the organization in building strong management teams, managing rapid growth and facilitating strategic partnerships. Venture capital is a subset of private equity asset class. This class includes venture capital, buyouts and mezzanine investment activities. While venture capital deals with private, young, fast growing companies; buyout and mezzanine investments focus on mature companies. Venture capital firms are professional investment firms that dedicate 100% of their time in investing in innovative companies on behalf of third party investors.
Venture capital activity has a significant impact on the economy of a country. Venture capital acts as a catalyst for job creation, innovation, technology advancement, international competitiveness and increased tax revenues.