VCs take minority stakes in businesses, very often alongside other VCs and investors. Many start-ups will also receive funding prior to Series A, via angel investment, crowdfunding, grants, incubators or even friends and family. Venture capital houses typically hold their investments for between five and seven years, at which point the business will either be floated on the stock exchange, acquired by a multinational corporate or another investor such as a private equity house.
Venture capital funds themselves raise money from institutional investors like pension funds, foundations, university endowments, insurance companies and others. Interested in learning more about the private markets? Download our guide to understanding this fast-growing economic sector. Download guide. Comments: Leave a comment. Name Business email Website Optional Comment. Thanks for commenting Our team will review your remarks prior to publishing. Please check back soon to see them live.
View comment 1. Related content. Load more. Contact Us info pitchbook. The dot-com boom also brought the industry into sharp focus as venture capitalists chased quick returns from highly-valued Internet companies. But the promised returns did not materialize as several publicly-listed Internet companies with high valuations crashed and burned their way to bankruptcy.
For small businesses, or for up-and-coming businesses in emerging industries, venture capital is generally provided by high net worth individuals HNWIs —also often known as " angel investors "—and venture capital firms.
The National Venture Capital Association NVCA is an organization composed of hundreds of venture capital firms that offer to fund innovative enterprises. Angel investors are typically a diverse group of individuals who have amassed their wealth through a variety of sources. However, they tend to be entrepreneurs themselves, or executives recently retired from the business empires they've built.
Self-made investors providing venture capital typically share several key characteristics. The majority look to invest in companies that are well-managed, have a fully-developed business plan , and are poised for substantial growth. These investors are also likely to offer to fund ventures that are involved in the same or similar industries or business sectors with which they are familiar.
If they haven't actually worked in that field, they might have had academic training in it. Another common occurrence among angel investors is co-investing , in which one angel investor funds a venture alongside a trusted friend or associate, often another angel investor.
The first step for any business looking for venture capital is to submit a business plan, either to a venture capital firm or to an angel investor. If interested in the proposal, the firm or the investor must then perform due diligence , which includes a thorough investigation of the company's business model , products, management, and operating history, among other things.
Since venture capital tends to invest larger dollar amounts in fewer companies, this background research is very important. Many venture capital professionals have had prior investment experience, often as equity research analysts ; others have a Master in Business Administration MBA degree.
Venture capital professionals also tend to concentrate on a particular industry. A venture capitalist that specializes in healthcare, for example, may have had prior experience as a healthcare industry analyst.
Once due diligence has been completed, the firm or the investor will pledge an investment of capital in exchange for equity in the company. These funds may be provided all at once, but more typically the capital is provided in rounds.
The firm or investor then takes an active role in the funded company, advising and monitoring its progress before releasing additional funds. The investor exits the company after a period of time, typically four to six years after the initial investment, by initiating a merger , acquisition, or initial public offering IPO. Like most professionals in the financial industry, the venture capitalist tends to start his or her day with a copy of The Wall Street Journal , the Financial Times , and other respected business publications.
Venture capitalists that specialize in an industry tend to also subscribe to the trade journals and papers that are specific to that industry. All of this information is often digested each day along with breakfast. For the venture capital professional, most of the rest of the day is filled with meetings. At an early morning meeting, for example, there may be a firm-wide discussion of potential portfolio investments. The due diligence team will present the pros and cons of investing in the company.
An "around the table" vote may be scheduled for the next day as to whether or not to add the company to the portfolio. An afternoon meeting may be held with a current portfolio company.
These visits are maintained on a regular basis in order to determine how smoothly the company is running and whether the investment made by the venture capital firm is being utilized wisely.
The venture capitalist is responsible for taking evaluative notes during and after the meeting and circulating the conclusions among the rest of the firm. After spending much of the afternoon writing up that report and reviewing other market news, there may be an early dinner meeting with a group of budding entrepreneurs who are seeking funding for their venture.
The venture capital professional gets a sense of what type of potential the emerging company has, and determines whether further meetings with the venture capital firm are warranted. After that dinner meeting, when the venture capitalist finally heads home for the night, they may take along the due diligence report on the company that will be voted on the next day, taking one more chance to review all the essential facts and figures before the morning meeting.
The first venture capital funding was an attempt to kickstart an industry. To that end, Georges Doriot adhered to a philosophy of actively participating in the startup's progress. He provided funding, counsel, and connections to entrepreneurs.
An amendment to the SBIC Act in led to the entry of novice investors, who provided little more than money to investors. The increase in funding levels for the industry was accompanied by a corresponding increase in the numbers for failed small businesses. Over time, VC industry participants have coalesced around Doriot's original philosophy of providing counsel and support to entrepreneurs building businesses. Due to the industry's proximity to Silicon Valley, the overwhelming majority of deals financed by venture capitalists are in the technology industry—the internet, healthcare, computer hardware and services, and mobile and telecommunications.
But other industries have also benefited from VC funding. Notable examples are Staples and Starbucks, which both received venture money. Venture capital is also no longer the preserve of elite firms. Institutional investors and established companies have also entered the fray. For example, tech behemoths Google and Intel have separate venture funds to invest in emerging technology. With an increase in average deal sizes and the presence of more institutional players in the mix, venture capital has matured over time.
The industry now comprises an assortment of players and investor types who invest in different stages of a startup's evolution, depending on their appetite for risk. Late-stage financing has become more popular because institutional investors prefer to invest in less-risky ventures as opposed to early-stage companies where the risk of failure is high.
Another noteworthy trend is the increasing number of deals with non-traditional VC investors, such as mutual funds, hedge funds, corporate investors, and crossover investors.
Meanwhile, the share of angel investors has gotten more robust, hitting record highs, as well.
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