What is a Venture Capital Firm?
Venture capital firms are investment companies that operate only to handle investments in business ventures that may be considered high risk. This type of firm may specialize in working with startup companies that are seeking funds to cover operational expenses until profitability is achieved, or it may focus on rescuing established firms that are in financial trouble but demonstrate some potential for becoming profitable again after some retooling. Some venture capital investment firms will provide funding for both situations, as well as short term projects that fall anywhere along the spectrum.
The size of a venture capital firm may vary from a small operation that works with a limited amount of seed money supplied by a few investors to a company that includes hundreds of investors and has billions of dollars at its command. However, the size of the firm is not always indicative of the type of venture capital deals that the company will take on. A large firm may choose to devote a portion of its attention to startups along with funding major deals involving the restructuring and renewal of well established international business entities.
What sets this type of company apart from other funding sources is that venture capitalists do not tend to be passive in their approach to the task. While many funding agencies will simply loan the money and expect nothing more than repayment according to terms, the venture capital firm will often take an active interest in the setup, operation, marketing, distribution, and sales efforts of the funded company. Generally, the contract between the firm and the client receiving funding will specify the rights and privileges of the firm in regard to involvement in the day-to-day functions of the client.
One additional benefit that a venture capital firm often brings to the table is the ability to create new vendor relationships between its clients. For example, Client A may manufacture an outstanding product, but does not have adequate distribution facilities. Client B possesses excellent distribution technology and facilities and can take over that function at a price that will cut expenses for Client A. The venture capitalist introduces the two clients, who are then able to strike a deal. As a result, both clients experience a healthier bottom line and, at the same time, the firm benefits from the healthier financial outlook of the clients.
@cardsfan27 - I don't think most venture capital firms are well publicized. It isn't surprising, though, that the vast majority of them are located in California where there are a lot of computer related start up companies.
I think it should be said, too, that most venture capital firms won't take just anyone, even if they do have a good idea. The companies are very selective, and only take 4 or 5 new projects a year. They want to make sure that they have plenty of time to devote to make the projects successful. Because of that, it is imperative that the companies have great ideas that can make a lot of money quickly. Most of the leading venture capital firms won't take any new business that they don't think can get to a point of earning several million dollars a year very quickly.
I am really only familiar with the major companies, though. I am curious if smaller venture capital companies exist to support small businesses like new restaurants and things like that.
How are venture capital firms usually compensated for their work? Obviously, they would get repayment of their loan, but is there anything else? Are the loans from a venture capital firm on par with those from a bank, or are they usually a little higher? Given a venture firm's involvement in the business, I am willing to guess that they also get a certain percentage of any profits.
I would almost have to think they get some sort of extra payment given their increased role. Also, if they are taking on all this extra risk of start-up businesses that have been turned down by other lenders, there are clearly cases where a business will fail, and they will never get their money back, so they have to make up for that somehow.
As far as firms in general, what are the top venture capital firms? Are there any common ones that I may have heard of, or are they generally low key businesses that aren't in the mainstream?
@JimmyT - I don't know if it is a steadfast rule, but I am willing to say you're probably right. If someone is willing to come to a venture capital firm and hand over part of the responsibility for their company to the firm, then it is probably because they couldn't find private capital from other sources. I don't think most start-ups would prefer to be in charge of everything if possible.
On the other hand, though, some new businesses might turn to venture capital firms because they actually do need someone who knows more about running a business than they do. They would also get the added benefits that the article mentions of possibly being put in contact with manufacturers and distributors that could increase their profitability. I guess there could be a variety of reasons someone would turn to a venture capital firm.
Reading the description about using a venture capital firm compared to just getting money from investors, it sounds like maybe venture capital companies are more important for businesses that can't find a way to get money from regular investors. Is that a good assumption?
In other words, venture capital firms are more willing to take on riskier companies, hence their increased involvement. I figure that when the companies succeed, though, they are much more successful than regular companies.
Just an example I am imagining in my head would be something like Apple or Microsoft. I don't know if it was the case for either of them, but I doubt most investors would have really been willing to put their money into a wild concept like personal computers, but a venture capital firm might have been willing to take the risk with the hope that it worked out and was hugely successful.
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