Most companies, when they start, do not have sufficient capital to fund their businesses. Their limited operating history, insufficient market experience and small capacity causes most capital investors in public markets and banks to reject applications for funds and loans. Excluding options like personal savings and business profits to launch businesses, most company owners turn to venture capital firms to meet their investment requirements.
What are Venture Capital Firms?
Venture capital firms are made up of venture capitalists, or venture capital investors (also general partners of the venture capital firms), who are typically a wealthy group of investors or an institution in possession of large amounts of capital. This capital is available from private or state pension funds, mutual funds, insurance companies, financial endowments from universities, foundations, etc, and is reserved for small business ventures that show promise of growth and high returns on investment within five to seven years.
Venture capital firms are based on organised limited partnerships. Partnerships consist of general partners and limited partners.
The limited partners are those individuals or institutions who invest large quantities of capital in venture capital firms.
The general partners serve as the firm’s managers and investment advisors with regard to funds raised by the investment firms. Also known as venture capitalists (VC), the general partners are highly experienced professionals from either a financial, or an operational background. Venture capitalists with expertise on operations and management are generally former executives or founders of companies. Venture capitalists with financial expertise generally hail from corporate finance or investment banking backgrounds.
Venture capital firms are formed as fixed-life partnerships, usually for ten years. Partnerships are closed to further or new investors once the required target for funds is reached.
How Do Venture Capital Firms Function?
Capital investments in start-up businesses are usually made through cash in exchange for company shares. The percentage of investment in businesses with good future prospects is generally small and involves the participation of venture capitalists in the company’s management. The entrepreneurial role assumed by the investor is accompanied by advanced and innovative business ideas that assure the steady growth of a young company. Dedicated venture capital firms employ experienced professionals to take care of small businesses in their nascent stages.
The role of venture capitalists is pivotal to the growth of a budding company. Venture capital firms ensure that new businesses are offered sustained assistance through financial support and equity securities. Venture Capitalists offer expert guidance throughout a company’s developmental process, while also actively assume responsibility of management and work. As part owner of the company, Venture Capital Firms help lay out smart and strategic business models and creative ideas for new products and services. Venture Capital investors also encourage high business risks to reap higher profits and good returns on capital investment.
Types of Venture Capital Firms
When individual investors or institutions invest financial capital, the pooled funds are organised as limited partnerships. Venture capital firms act as general partners and exercise their right as managers of the firm and advisors with regard to capital investments.
Private Independent Firms are types of venture capital firms that are independent of affiliations with other financial organisations.
Some venture capital firms are affiliated to, or are subsidiaries of, an insurance company, or an investment or commercial bank. These venture firms arrange investments on behalf of clients of the parent venture firm or third-party investors.
Some venture firms that are subsidiaries of non-financial, business corporations, and make investments on behalf of the parent firm, are known as corporate venture or direct investors venture capital firms.
There are also organisations that honour investment programmes affiliated to the government. These venture firms help start-up companies by securing capital investments for them from federal, state or local fund programmes. This usually means increasing the investment amount by combining the venture firm funds with federal funds. This investment capital is then used in suitable companies to draw maximum benefit on returns.
How to Select Good Venture Capital Firms
The type of venture firm you approach will depend on your business requirements. Venture capital firms offering funds to internet companies will differ from those focused on manufacturing industries, for instance. Initial research before approaching a venture capital firm will save you time later. You must also search for the following information in their investment portfolio:
The type of industry they are focused on
The kind of businesses they invest in, and whether these businesses are established or fresh, start-up businesses
- Is the investment sum they are offering sufficient for your business needs?
- Where are they located and what businesses do they fund?
- Are they regional, or concentrated on national and international businesses?
- How much return on investment do they expect?
- How involved will they be in your business?
When you target specific venture capital firms, you are assured of the best results for your business in terms of investment that will help you take your business forward.