Venture capital is basically a type of private equity funding, which is given by venture capital funds or private equity firms to budding, early-stage, or emerging small businesses that are deemed to possess high venture potential or that have shown preeminent growth potential. This money is raised for a minimum of six months and given for the capital cost only. The money is not used as an investment yield, but is meant to serve as a source of short-term liquidity for the business and its owners. It is also supposed to be paid back within a year of the date of investment.
Private equity firms typically make and distribute investments in the thousands rather than tens of thousands of dollars. As a result, they are able to accept smaller venture capital loans from their borrowers because of their size. These companies typically hire investment banks as financial advisors.
Small business investment firms are responsible for acting as venture capitalists for their clients. These firms help raise funding for prospective entrepreneurs by providing them with lines of credit. This credit facility allows them to fund a small business based on their investor’s capacity to deliver a return. To be eligible for this funding, an investor needs to meet the criteria set by the venture capital industry. The venture capital industry sets minimum fund requirements and also requires the minimum initial funding amount.
Venture Capitalists is typically active mutual fund investors. However, there are also individual venture capitalists who are sole investors. Most venture capitalists are wealthy individuals. These wealthy investors use their wealth to fund early-stage companies in their portfolios. For example, many private investors, including institutional and wealthy hedge funds, have made investments in technology companies that later went public in the past few years. Some of these investments have reached well beyond their initial expected value.
Many small businesses that seek venture capital funding do not necessarily need to raise a full-scale capital investment. In some instances, these companies may only need the venture capital fund to provide seed money for their development process. Typically, the company will generate most of its profits from the operation and sales of its product or service. A portion of the profits from the product or service will be shared by the venture capital firm with the early-stage small businesses.
The risks associated with investing in venture capital funds are similar to those of investing in private equity. There is also the potential for a substantial loss of capital, when a private firm folds, regardless of the reason for the bankruptcy. The liquidity of venture capital funds is also somewhat limited. As with most private equity investments, most venture capital funds have a redemption period of up to five years. Before an investor contributes to a venture capital fund, he or she should obtain specific information regarding the expected returns.