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Venture Capital

Venture Capital firms are private equity firms that invest in startups or high growth companies. A Venture Capital firm establishes one or more funds. Similar to a mutual fund, investments are solicited from investors into the fund and invested according to the parameters set when the fund was established. Unlike a mutual fund, they are not publicly traded and generally do not invest in publicly traded stock. Venture Capital Funds always have a fixed duration, typically ten years. For this reason, the general goal of a Venture Capital firm is to make a private investment in a company and realize significant returns by either selling the company or through an initial public offering (IPO) within 3-5 years.

Start up companies typically go through several "waves" of funding. With each wave, more equity is issued to the new investors which dilutes the interest of the existing owners. Very few Venture Funds are willing to invest in the first wave, most prefer to invest in the second or third wave. Those that do invest in the first wave are looking for significant returns. Because of the high returns sought by venture capital funds, they tend to invest in companies that have huge growth potential. The technology and biotechnology industries attract the lion's share of venture capital money, but there are funds who invest in other areas as well. For example, funds are appearing that invest in companies selling products or services related to Homeland Security and in companies producing alternative fuels.

When a Venture Capital finances a company, there is typically a very tight agreement that outlines performance expectations. If the business does not meet those expectations, the fund may have the right to replace the management team, among other things. The potential sharing or loss of control over your business should be carefully considered when deciding to allow venture capital funding in a company.

Venture capital can be a good source of funding to a company as traditional debt products are difficult to obtain if the company is growing at a very rapid pace and has been a critical element in supporting entrepreneurship. For more information, see the National Venture Capital Association at www.nvca.org.