Venture capital is a type of private equity capital. A venture capital investment is generally a high-risk investment, but it offers the potential for an above-average returns for the investor. Venture capital is typically provided by outside investors for financing new or growing businesses. A venture capitalist (VC) is a person who makes a venture capital investment. The initial, start-up money is referred to as “seed money” and entails the greatest risk. If the project gets off the ground it may require additional financing at additional “rounds” before the company is finally brought to the market and the venture capitalist can enjoy handsome rewards.
The role of the venture capitalist is to provide financing and guidance to companies with promising technologies and products. Venture capital firms often invest large sums of money that will drive value in the public market or the eyes of other potential investors and acquirers. The level of involvement from the venture capital varies from firm to firm but they always play an active role in ensuring there is a strong management team proving leadership to the company.
A venture capital investor is responsible for many different stages of the venture capital transaction process. The venture capitalist will identify and provide a detailed evaluation of potential investment opportunities, negotiate the terms for new investments, and create an ongoing support channel for the portfolio companies. Venture capitalist firms are very useful for ideas that wouldn’t normally be in the business market, especially scientific innovation. These firms have the capital necessary to take the idea and make it into a commercial reality. Venture capitalists successfully integrate information from a wide range of disciplines to quantify the risks associated with the different business proposals and the potential value that the opportunities will create in the long-term. For companies that are cash flow positive and not in high growth cycles, venture capital is not the best option.