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What is Venture Capital?

Definition: Venture capital, also called VC, refers to the financing of a startup company by typically high-wealth investors who think the business has potential to grow substantially in the long run. Typically, VCs only invest in startup companies up to a certain percentage.

What Does Venture Capital Mean?

What is the definition of venture capital? VC is used to fund a startup when there is a need to grow the business and realize an above-average profit. At this stage, a venture capitalist invests in a firm that has a high growth potential and can generate viable profits in the long-term.

Usually, venture capitalists invest their money in firms that have limited or no access to capital markets, thereby fueling their core operations while leveraging risk. From the business owner perspective, the downside is that venture capitalists are free to state their opinion and require changes in the company so that it becomes profitable and they are not losing the invested capital.

Letís look at an example.

Example

Andy is an investment manager, and he is involved in VC funding. He likes to invest in relatively high-risk companies with a high growth potential, in spite of the size. He has participated in the funding of small caps, up to $2 billion, but also to mid-caps with funds that exceeded $3 billion. Normally, his investment horizon is 5-7 years during which Andy expects to realize a high return.

The potential for above-average returns is what keeps Andy funding different companies. Moreover, he manages money that he can pool from third parties, such as people who have a lot of money and are interested in becoming limited partners to small or medium-sized startups.

Usually, Andy invests at the development stage of a company. Funding a company at its early stage is not intriguing for him because the company is not 100% developed. The capital required for funding a company at the early stage may cover the market research, the establishment of legal frameworks for investors, and so on. Conversely, funding a company at the development stage allows a comparison with similar companies that operate in the same industry. At this stage, or in the acquisition stage, Andy can request a certain percentage of ownership to the company and participation in the board of directors, therefore, having a say about the future steps of the company.

Summary Definition

Define Venture Capitalist: Venture capital means the funds used to invest in new businesses that have a high likelihood of growing drastically in the near future.

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