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 Venture capital is money provided by experts who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an essential supply of equity for start-up companies startup innovative.

Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.

Venture capitalists generally:

- Finance new and rapidly growing companies;
- Purchase equity securities;
- Assist in the development of new services or services;
- Add value to the company through active participation;
- Take higher risks with the expectation of higher rewards;
- Have a long-term orientation

When it comes to an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only invest in a small percentage of the businesses they review and have a long-term perspective. Going forward, they actively use the company's management by contributing their experience and business savvy gained from helping other companies with similar growth challenges.

Venture capitalists mitigate the chance of venture investing by having a portfolio of young companies in a single venture fund. Many times they'll co-invest with other professional venture capital firms. In addition, many venture partnership will manage multiple funds simultaneously. For many years, venture capitalists have nurtured the growth of America's high technology and entrepreneurial communities causing significant job creation, economic growth and international competitiveness. Companies such as for instance Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genentech are famous types of firms that received venture capital early inside their development.

Private Equity Investing

Venture capital investing has grown from a tiny investment pool in the 1960s and early 1970s to a main-stream asset class that's a feasible and significant area of the institutional and corporate investment portfolio. Recently, some investors have been discussing venture investing and buyout investing as "private equity investing." This term can be confusing because some in the investment industry use the term "private equity" to refer simply to buyout fund investing.

In any case, an institutional investor will allocate 2% to 3% of their institutional portfolio for investment in alternative assets such as for instance private equity or venture capital included in their overall asset allocation. Currently, over 50% of investments in venture capital/private equity comes from institutional public and private pension funds, with the total amount via endowments, foundations, insurance companies, banks, individuals and other entities who seek to diversify their portfolio with this investment class.

What is a Venture Capitalist?

The typical person-on-the-street depiction of a venture capitalist is that of a rich financier who would like to fund start-up companies. The perception is that an individual who develops a brand new change-the-world invention needs capital; thus, should they can't get capital from the bank or from their very own pockets, they enlist the aid of a venture capitalist.

In truth, venture capital and private equity firms are pools of capital, typically organized as a restricted partnership, that invests in firms that represent the ability for a high rate of return within five to seven years. The venture capitalist may look at several hundred investment opportunities before purchasing only some selected companies with favorable investment opportunities. Far from being simply passive financiers, venture capitalists foster growth in companies through their involvement in the management, strategic marketing and planning of their investee companies. They're entrepreneurs first and financiers second.

Even individuals might be venture capitalists. In the early days of venture capital investment, in the 1950s and 1960s, individual investors were the archetypal venture investor. While this kind of individual investment didn't totally disappear, the modern venture firm emerged since the dominant venture investment vehicle. However, within the last few couple of years, individuals have again become a potent and increasingly larger area of the early stage start-up venture life cycle. These "angel investors" will mentor an organization and provide needed capital and expertise to greatly help develop companies. Angel investors may either be wealthy people who have management expertise or retired business men and women who seek the ability for first-hand business development.

Investment Focus

Venture capitalists might be generalist or specialist investors depending on their investment strategy. Venture capitalists can be generalists, purchasing various industry sectors, or various geographic locations, or various stages of a company's life. Alternatively, they could be specialists in one or two industry sectors, or may seek to purchase just a localized geographic area.

Not absolutely all venture capitalists spend money on "start-ups." While venture firms will spend money on companies which are inside their initial start-up modes, venture capitalists will also spend money on companies at various stages of the company life cycle. A venture capitalist may invest before there is a genuine product or company organized (so called "seed investing"), or may provide capital to set up an organization in its first or second stages of development called "early stage investing." Also, the venture capitalist may provide needed financing to greatly help an organization grow beyond a critical mass to be successful ("expansion stage financing").

The venture capitalist may invest in a company through the entire company's life cycle and therefore some funds focus on later stage investing by giving financing to greatly help the company grow to a critical mass to attract public financing through an investment offering. Alternatively, the venture capitalist might help the company attract a merger or acquisition with another company by giving liquidity and exit for the company's founders.

At the other end of the spectrum, some venture funds specialize in the acquisition, turnaround or recapitalization of public and private firms that represent favorable investment opportunities.

You will find venture funds that'll be broadly diversified and will spend money on companies in several industry sectors as diverse as semiconductors, software, retailing and restaurants and others that may be specialists in only one technology.

While high technology investment makes up the majority of the venture purchasing the U.S., and the venture industry gets a lot of attention for the high technology investments, venture capitalists also spend money on companies such as for instance construction, industrial products, business services, etc. There are several firms that have specialized in retail company investment and others that have an emphasis in investing only in "socially responsible" start-up endeavors.

Venture firms come in various sizes from small seed specialist firms of only some million dollars under management to firms with over a thousand dollars in invested capital across the world. The normal denominator in many of these types of venture investing is that the venture capitalist isn't a passive investor, but has an energetic and vested interest in guiding, leading and growing the firms they've invested in. They seek to incorporate value through their experience in purchasing tens and a huge selection of companies.

Some venture firms are successful by creating synergies between the different companies they've invested in; for example one company that has a good software product, but does not need adequate distribution technology might be paired with another company or its management in the venture portfolio that has better distribution technology.

Period of Investment

Venture capitalists will help companies grow, but they eventually seek to exit the investment in three to seven years. An early on stage investment make take seven to a decade to mature, while a later stage investment many just take many years, so the appetite for the investment life cycle should be congruent with the limited partnerships' appetite for liquidity. The venture investment is neither a brief term nor a fluid investment, but an investment that must be created using careful diligence and expertise.

Forms of Firms

There are several types of venture capital firms, but most mainstream firms invest their capital through funds organized as limited partnerships in which the venture capital firm serves as the overall partner. The most common kind of venture firm is an independent venture firm that has no affiliations with any other financial institution. They are called "private independent firms" ;.Venture firms are often affiliates or subsidiaries of a commercial bank, investment bank or insurance company and make investments on behalf of outside investors or the parent firm's clients. Still other firms might be subsidiaries of non-financial, industrial corporations making investments on behalf of the parent itself. These latter firms are usually called "direct investors" or "corporate venture investors."

Other organizations may include government affiliated investment programs that help set up companies either through state, local or federal programs. One common vehicle is the Small Business Investment Company or SBIC program administered by the Small Business Administration, by which a venture capital firm may augment its own funds with federal funds and leverage its investment in qualified investee companies.

Whilst the predominant kind of organization is the limited partnership, lately the tax code has allowed the forming of either Limited Liability Partnerships, ("LLPs"), or Limited Liability Companies ("LLCs"), as alternative types of organization. However, the limited partnership continues to be the predominant organizational form. The advantages and disadvantages of every has regarding liability, taxation issues and management responsibility.

The venture capital firm will organize its partnership as a pooled fund; that's, a fund comprised of the overall partner and the investors or limited partners. These funds are usually organized as fixed life partnerships, usually having a life of ten years. Each fund is capitalized by commitments of capital from the limited partners. When the partnership has reached its target size, the partnership is closed to further investment from new investors as well as existing investors so the fund has a fixed capital pool where to create its investments startup innovative.