- Most VCs today invest through venture capital funds that pool investor money to invest in new ventures. A venture capital fund has partners and/or a manager, staff and investment criteria to select potential investments. For example, it may specialize in software, medical devices, drugs or nanotechnology. Partners and many managers are venture capitalists themselves, so in its broadest sense, the term “venture capitalist” applies to venture capital fund investors and the individuals who run the fund.
- Unlike portfolio investors who buy stocks or bonds and wait for them to go up, VCs interact with the companies they support in being actively involved in top management and key personnel decisions, product and business development and strategic direction.
- In the end, the goal of a VC is to make money. Many entrepreneurs looking to attract venture capital fail to recognize that fact. They play up their invention or new drug potential while failing to answer the simple question: how will the VC make money? An invention or a new drug are important to a VC only as a tool to make money.
- VCs profit when a venture capital-backed company is sold either in an IPO or to another company. A VC’s ability to make money depends entirely on finding a buyer, as was evidenced by the Internet bubble when dozens of Internet companies without product or service or even a chance to become profitable--with a business plan scribbled on a paper napkin over lunch--were sold to starry-eyed investors in spectacular IPOs only to become even more spectacular failures.
- It may take a venture capital-backed company several years to reach profitability and/or to get ready to be sold. Venture capital-backed companies still have a high failure rate. VCs tie up their capital for several years in several funds or companies, are prepared to put up more money if needed and accept many failures--all in hopes of reaping an occasional windfall.
- Advertisement -
- Advertisement -