Investing in Venture Capital
Venture capital is the kind of capital financing that is often provided by venture capital funds or private equity firms to start-ups, small-scale, or emerging businesses that have been deemed to possess high potential for growth or that have shown impressive initial growth. These businesses receive funding in the form of shares from venture capitalists, who act as the investment fund, with the company receiving a percentage of the purchase price as equity in the company. This is the most highly sought type of equity investment due to its potential for quick return on investment and the potential for large gains. The risks, too, are somewhat high for these investments.
Investing in venture capital has become more difficult over the years, however, because of the current financial crisis. This is not an industry that is considered to be particularly stable, so the unexpected can happen. Another reason for the increasing popularity of this investment strategy is that the amount of risk typically associated with private equity is relatively low for start-ups. Also, while many small businesses are considered to be too risky to support on their own venture capital funding allows small businesses to draw on resources that would not be available to them without outside funding. Venture capitalists may invest in a range of business opportunities, including those that are considered high-risk or highly speculative.
Investors in venture capital firms are usually wealthy entrepreneurs who trust that the venture capital firm will provide a reasonable return on their investment. This level of trust is also based upon the performance of the portfolio of investments that the firm has chosen for its portfolio. For instance, rather than investing in one or two industries, wealthy entrepreneurs may prefer to add a broad spectrum of assets to their portfolio. These may include industries such as technology, energy, telecommunications, transportation, pharmaceuticals, biotechnology, and banking, as well as financial portfolios such as commercial paper, corporate bonds, and mortgage backed securities. In addition, venture capitalists may invest in new companies or may choose to add an existing portfolio of companies to their portfolio.
Venture capitalists are able to access new business opportunities through a variety of means. They can participate actively in the financing of startups, providing seed money and /or acting as an investor. Participating actively in financing of startups enables them to become intimately involved in the day-to-day operations of the companies they are financing. They can help to oversee the structuring of the deal, negotiating offers and contracts, and supervising the handling of negotiations and / or managing the business once the deal has closed. However, companies need more than cash from venture capitalists to get off the ground, they also require access to successful IPOs, access to qualified personnel, knowledge of market trends, and a track record of success.
To manage venture capital investments effectively, it is critical that startups take a few steps to ensure that they don’t violate any laws or investment practices while underwriting their funding. Among these are having an outside attorney to handle the transaction, setting up a limited liability company (or LLC), making sure that all investors are accredited investors, making sure that all funds are deposited into a trust account, following due diligence regarding all investment properties, and staying within the account minimum. While there are no guarantees regarding any one of these elements, most entrepreneurs will be familiar with some or all of them. In the case of raising angel capital from a third party investor, for example, it is important that the company satisfies the standard investor requirements and provides documentation regarding its solvency and other issues.
It is also important to keep in mind that when it comes to working capital, it is important not to invest all of your savings in a single startup. Rather than putting all of your eggs in one basket, it makes much more sense to diversify your portfolio, spread your risk, and try to make as many investments as possible in different businesses. By being conservative when it comes to working capital, you reduce the risk that you will lose money on each one of your individual investments. As such, it is important to carefully consider whether each new investment is worth the effort of putting all of your savings into that particular venture. Diversification is key if you want to find success as an entrepreneur.
