The emergence of Venture Capital as a business model has been a fascinating and challenging story. Founder Georges Doriot created the American Research and Development Corporation in 1946 and raised a fund of $3.5 million to invest in companies commercializing WWII technologies. Doriot’s first investment was x-ray technology, which eventually went public for $1.8 million. Today, venture capital firms are headquartered around the world and are often very selective in their investments.
Venture Capital is unique because it serves a niche in the capital markets. Founders and entrepreneurs often have innovative ideas that would not be financially feasible for any other institution. Banks generally charge a higher interest rate than VCs because they are new and therefore have fewer assets. VC funds are not subject to these limitations. Moreover, in today’s economy, many start-ups do not have hard assets, which is the primary reason why they require a higher interest rate.
A VC fund’s investors are mostly institutional investors. The limited partners are usually high net-worth individuals. The minimum investment is $300,000 or $1 million. Some venture capital funds may also allow high-net-worth individuals to invest directly in a company. It is important to note, however, that the minimum investment amount depends on the type of venture capital fund. If you are interested in becoming a limited partner in a VC fund, seek financial advice from a financial advisor.
Private equity is another type of venture capital. Unlike venture capital, private equity firms typically purchase 100% of a company and the founders are only a minority investor. However, this type of financing involves lower risk and larger investments. Nevertheless, venture capitalists can expect high returns and help young companies obtain funding. So, how does venture capital differ from private equity? So, how does it differ from other types of business funding? By focusing on its role, it is easier for young businesses to secure growth and stability.
In 1978, a major fundraising year for venture capital was seen. In this year, $750 million was raised in the industry. Earlier, the ERISA prohibited most private investments, including those in privately-held companies. However, the US Labor Department relaxed ERISA restrictions in 1977, and corporate pension funds became the major source of capital for venture capitalists. In March 2000, the NASDAQ Composite index reached a high of 5,048.
The US venture-capital industry is an envy of the world, and a great deal of its success can be attributed to the industry’s diversified portfolio. But, the reality of the venture-capital industry is quite different. Its ethos is not necessarily based on risk-taking, but on achieving profits and minimizing losses. There is a disproportionate amount of risk, but it is certainly worth the risks.