Who Are Venture Capitalists?

Who Are Venture Capitalists?

A venture capitalist is an individual who makes investments in business ventures and provides capital for a start-up or an expansion. Venture capitalists by virtue of the concept of venture capital seek a higher rate of return than would be expected or given from traditional kinds of investment. Usually, venture capitalists look for 25 per cent and more returns in exchange of funds.

Let’s take a closer look at who are venture capitalists. Venture capitalists are well placed private investors who can help your business grow manifold or help you raise out of a financial crisis by providing private equity. With humongous wealth as well as expertise to mentor companies at their end, venture capitalist said small companies or start-ups by financing their growth plans.

Venture capitalists are experts in investing for companies that are only in their infancy or are developing in the market. Every venture capitalist handles the task of managing funds and looking out for suitable investments for the same. A venture capitalist need not have a certain amount or degree of business experience that is applicable to the industry to which the company is related.

Venture capitalists are not typically people who call themselves wealthy financiers. Unremarkably most venture capitalists comprise of limited partnerships that have a fund of pooled investment, which they make use of to invest in various companies that are in dire need of funding. The number of venture capitalists vary in size from one firm to another as there might be some firms that manage funding investments of as less as a few million dollars to those that manage funding investments of over several billions of dollars in companies scattered all over the world.

Under normal circumstances, venture capitalists can be a small group of investors or even a subsidiary of large investing firms like large commercial banks, insurance company, investment banks et cetera that make investments to clients who seek funding on behalf of the parent company or to outside investors. In almost all the cases that involve venture capital, venture capitalists aim to use their knowledge, experience and expertise in business management to make the funding and help in nurturing the companies that will eventually bring about a substantial return on the investment of the venture capitalist. The time period that venture capitalists usually dedicate for the company to yield substantial returns varies from three to seven years.

Investments by a venture capitalists do not always bring about a good payoff. The rate at which the returns fail can also be quite high and therefore range from 20 per cent to 90 per cent. In several cases, over 90 per cent of the portfolio companies had failed to incur substantial returns, thereby putting the venture capitalist into a huge loss. However, it is the skills of venture capitalists to study the future capital and make the predictions according to the market behaviour and finally agree on offering the funds. When venture capitalists succeed in the investments, a fund can easily offer returns of 300 to 1000 per cent.

As part of the equity, venture capitalists usually have a say in how the portfolio company operates to move in the right direction. Venture capitalists also help the company grow by involving in the managerial, planning and strategic decisions. Venture capitalists lay trust on the expertise of general partners who might be former bankers, CEOs, experts in an industry et cetera to aid it in the process of helping the industry grow. Generally, one or more partners of the venture capitalist take the position of Board of Director at the portfolio company. They also sometimes work towards recruiting key executives to the same company.

Steps you should consider before finalising funding

  • You must take a few steps before you approach a venture capitalist for funding requirements, like, looking for a suitable venture capitalist in the market that is likely to accept your business plan. Not all the venture capitalists invest in start-ups because of a higher degree of risk involved in investing. While some venture capitalists may invest small amounts of capital for early ventures, others are likely to invest only at the end of the business cycle thereby specializing in turnarounds, buyouts and recapitalizations.
  • Venture capitalists can be generalists that invest in several industries of different kinds that are located at different places. They specialize in a particular industry and can be looked out for by entering the most specific details that are close to what you want. It is desirable to make sure that your company falls within the venture capitalists target industry before you step ahead to make a pitch. For instance, a company that is looking for a biotechnology start-up company will not consider your business plan for the development of your semiconductor firm. Reviewing the website of a Venture capitalist is the best answer to all the questions that you may want to ask pertaining to your funding preferences.
  • A Venture capitalist may also have a preference of location. This is because being in the same location as the portfolio company helps the venture capitalist to better assist the business operations like marketing, financing, personnel et cetera. Therefore, while choosing your venture capitalist make sure he or she is settled in close proximity to the location of your company.
  • Most importantly, venture capital is not the answer to all kinds of businesses. Venture capitalists do not choose companies randomly. In fact, they choose very few companies. This might also suggest that your company will not qualify. Usually venture capitalists are more interested in businesses that have a high growth potential, which will allow them to exit with a better-than-average return within three to ten years. However, the time limit depends on the kind of investment. Considering the rigorous expectations of the venture capitalists, they tend to invest in companies that are rapidly expanding. Some of these industries include those that are centred on technology, life sciences and biotechnology. There are several alternative that you can explore while searching for funding resources to help grow your company.