Venture capitalists are investors who indulge in investing a large number of funds for companies to help them grow. These venture capitalists invest money along with their management skills and expertise for the portfolio company. It is in fact the crucial source of support for companies that who are in their infancy or are recovering from loss. Some venture capitalists work under the guidance of private partnerships or well-knit corporations that are financed by private/public pension funds, corporations, foundations, foreign investors, wealthy individuals and other venture capitalists.
Generally, the venture capitalists perform the following functions:
- Purchase equity securities
- Finance new as well as fast-rising companies
- Offer valuable help in developing new products as well as unique services
- Take high degree of risks by investing in companies with an expectation of high rewards from the same
- Seek continuous orientation
- Enhance the value of the company through active participation
Which industries should the venture capitalists invest in?
While considering a potential company to invest in, the venture capitalists closely scrutinize and analyse the technical as well as business assets of the portfolio company. They usually invest in companies that have a huge turn over by the end of the financial year. This is because the venture capitalists are part of large private firms that work professionally and pool in massive funds to help the already successful industries to become even bigger and get profit. This has a long-term perspective that ensures that the venture capitalists can invest in the company again at a later period. They work actively with the management team of the company by feeding in their valuable inputs gained through experience.
Venture capitalists can either be specialist or generalist investors who invest in various investment sectors located at different places. Often, a handful of Venture capitalists also opt to be expert specialists in one particular industry sector or even only one localized development region. Usually, venture capitalists are positive about investing in start-up companies owing to the fact that they tend to start their investments at $2 million per company, which might not be the budget that starts up companies are expected to have. Though most venture capitalists invest in budding companies, there are several others who invest in companies that are at different stages of their business cycle.
Venture capitalists have the potential to invest before there is a real product or company organized or they may provide capital to start up a company in its first or second stages of development, which is usually called early stage investing. Venture capitalists can also indulge in offering expansion stage financing, by virtue of which the required financing that is needed to help a company grow beyond a critical mass to become a more successful company or business.
The venture capitalist invests in a company through the span of the company’s life and hence there are some funds that focus on investing on the later stage that help the company to incur massive profit scales. This in turn often attracts a merger or acquisition by offering liquidity as well as an opportunity for the founders of the company to exit. Certain venture funds, on the other hand, cater to acquisitions, re-capitalization of public/ private companies or turnaround et cetera that hold favourable opportunities for investment. Several venture funds can be broadly categorized as they invest in a diversity of industries like semiconductors, retailing, software, restaurants and even those that specialize in technology.
While investing in high technology makes up most of the capital investment in the UK, the venture industry attracts a lot of attention owing to its massive funding and turnover. Other industries that venture capitalists invest in include industrial products, construction, business services et cetera. There are venture capital companies that have a specialization in investing in retail companies while others focus on investing in start-up companies that have a social connection. A venture capitalist not just invests passively but guides the interest in investing for a particular company.
Length of a venture capital investment
Venture capital investments usually like to exit the investment period within 3-7 years. If the investment is made in the initial stages, it may take 7-10 years to ripen and if it is made in the later stages, it is likely to take far fewer years to mature. A venture capital investment must be made with careful diligence as well as expertise because it is neither short term nor a liquid investment.
Types of firms
There are varieties of firms that invest in companies for funding but most firms invest their capital through funds that are organized as limited partnerships in which the venture capital firm works as a general partner. The most independent venture capital firm is one that does not have any affiliation with any other financial institution. These firms are often termed as “private independent firms”. Venture firms can also be subsidiaries or affiliates of a commercial bank, an insurance company or an investment bank. Through these subsidiaries, the venture capital investment firm can make an investment on behalf of the clients of the parent firm. Other firms can still be subsidiaries of non-financial institutions and industrial corporations. The latter firms are termed as “direct investors” or “corporate venture investors”.
Forms of investing
There are a variety of investing methods, one of them being the corporate venturing method, which was popular in the 1980s. It is usually called direct investing in portfolio companies by virtue of venture capital programs or the subsidiaries of non-financial companies or corporations.
Commitments and fund raising
Fundraising can be defined as the process of going through seeking investment commitments from the investors.
Capital calls
Capital calls is a general term used to refer to the “calling” of limited partners commitments by the venture firms while making investments in the portfolio companies. Other types of investing
Considering the fact that venture firms are private firms, there can be no way they can exit before the partnership matures or expires completely. There are secondary partnerships that specialize in the purchase of portfolios of the investee company investments of the existing company.