Venture capital is basically a group of business people who specialize in investing in small businesses to provide them funding for their business operations. Private investors who provide venture capital to promising business ventures.
The venture capitalists are persons who invests in a business venture, providing capital for start-up or expansion. Venture capitalists are looking for a higher rate of return than would be given by more traditional investments.In return, when the business is sold they make a profit on their investment.
Venture capital firms are pools of capital, usually organized as a limited partnership. The money comes from private investors or institutions like banks and pension funds.
Venture capitalists typically put this money in small, fast-growing companies who cannot raise funds on the stock market.
They can invest in companies at any stage of the business cycle.
In return for this medium or long-term financing - usually for five or seven years - the investors receive a share of the company's equity.
They typically invest where at least 25 percent annual returns within one to five years are feasible, and often demand 50 percent or more ownership to exercise control over the invested firm to offset their high risk. Often they also provide management and industry expertise and business connections with other firms and venture capitalists. Their objective usually is to bring the business to its initial public offering (IPO) stage so that they can sell their shareholdings to the public at high profit, and get out.
Generally, venture capitalists are looking for returns of 25 percent and up.
A venture capitalist is a professional investor. He or she manages a fund and is looking for suitable investments for that fund.
In other words, the venture capitalist may have no business experience applicable to the industry your company is involved in, and is focused on the potential rate of return your company can provide.
For example, the business I used to work for was owned by the founder. He wanted money to grow the business so that he could sell it to someone else or another business. The owner contacted several venture capitalist firms. They met and discussed the companies business plan and one company decided to invest $5 million dollars in the business and they took 49% of the company stock. The owner retained the other 51%.
Over the next 2 years, the venture capitalist were not happy with how the owner was running the business. So they invested another $2 million to buy a majority stake in the company. I think they had 60%. The installed their own CFO and their own VP of sales, weeded out some dead wood employees, and in 2 years the company was sold for $19 million. So the original owner was paid $7.6 mil for his 40% stake and the venture capitalist made $11.4 million. After their original investment, that netted out to a $4.4 million profit. In most situations the venture capitalist make more than the actual example I gave.
So basically the venture capitalist invests in a business in order to make money. Just like someone may buy BW3 stock at $5 and sell it for $35. They make a profit of $30 per share.
Management role
The venture backer may also seek a non-executive board position and attend monthly Board meetings.
They provide far more than a cheque, stepping in with experience, contacts and advice when required.
About 50% of venture capital financing are for expansion, specifically to help existing businesses to grow and compete, the British Venture Capital Association said.
For some companies, that cocktail of cash and advice was just what they needed.
Some well known UK companies were built with venture capital, for example Lastminute.com, National Express Group, Trafficmaster and Whittards of Chelsea.
In the US, companies such as Apple, Federal Express, Compaq, Sun Microsystems, Intel and Microsoft are famous examples of companies that received venture capital early in their development.
In other cases, pride has come before a fall.
In the 1980s, management buyout funds competed to gain control of Magnet, a supplier of kitchens and bathrooms. The winning bidder had no more success managing the company than the old management.
UK statistics
Almost three million people in the UK are employed by companies backed by venture capital, according to the British Venture Capital Association.
Many of these companies - and the jobs they provide - might not be in existence without the injection of cash and guidance venture capitalists provide, the BVCA said.
Venture capital is usually concentrated in the newer fast growing sectors of the economy, such as the internet, and over half of all funds invested in the UK were in hi-tech firms.
These fast growth sectors often have few other alternatives to make their business plans a reality.
The UK venture capital industry has invested almost £50bn in up to 23,000 companies since 1983.
And it is still growing, with the total funds invested by UK venture capitalists in 2001 rising to £12bn, up 36% from the previous year.
The venture capitalists are persons who invests in a business venture, providing capital for start-up or expansion. Venture capitalists are looking for a higher rate of return than would be given by more traditional investments.In return, when the business is sold they make a profit on their investment.
Venture capital firms are pools of capital, usually organized as a limited partnership. The money comes from private investors or institutions like banks and pension funds.
Venture capitalists typically put this money in small, fast-growing companies who cannot raise funds on the stock market.
They can invest in companies at any stage of the business cycle.
In return for this medium or long-term financing - usually for five or seven years - the investors receive a share of the company's equity.
They typically invest where at least 25 percent annual returns within one to five years are feasible, and often demand 50 percent or more ownership to exercise control over the invested firm to offset their high risk. Often they also provide management and industry expertise and business connections with other firms and venture capitalists. Their objective usually is to bring the business to its initial public offering (IPO) stage so that they can sell their shareholdings to the public at high profit, and get out.
Generally, venture capitalists are looking for returns of 25 percent and up.
A venture capitalist is a professional investor. He or she manages a fund and is looking for suitable investments for that fund.
In other words, the venture capitalist may have no business experience applicable to the industry your company is involved in, and is focused on the potential rate of return your company can provide.
For example, the business I used to work for was owned by the founder. He wanted money to grow the business so that he could sell it to someone else or another business. The owner contacted several venture capitalist firms. They met and discussed the companies business plan and one company decided to invest $5 million dollars in the business and they took 49% of the company stock. The owner retained the other 51%.
Over the next 2 years, the venture capitalist were not happy with how the owner was running the business. So they invested another $2 million to buy a majority stake in the company. I think they had 60%. The installed their own CFO and their own VP of sales, weeded out some dead wood employees, and in 2 years the company was sold for $19 million. So the original owner was paid $7.6 mil for his 40% stake and the venture capitalist made $11.4 million. After their original investment, that netted out to a $4.4 million profit. In most situations the venture capitalist make more than the actual example I gave.
So basically the venture capitalist invests in a business in order to make money. Just like someone may buy BW3 stock at $5 and sell it for $35. They make a profit of $30 per share.
Management role
The venture backer may also seek a non-executive board position and attend monthly Board meetings.
They provide far more than a cheque, stepping in with experience, contacts and advice when required.
About 50% of venture capital financing are for expansion, specifically to help existing businesses to grow and compete, the British Venture Capital Association said.
For some companies, that cocktail of cash and advice was just what they needed.
Some well known UK companies were built with venture capital, for example Lastminute.com, National Express Group, Trafficmaster and Whittards of Chelsea.
In the US, companies such as Apple, Federal Express, Compaq, Sun Microsystems, Intel and Microsoft are famous examples of companies that received venture capital early in their development.
In other cases, pride has come before a fall.
In the 1980s, management buyout funds competed to gain control of Magnet, a supplier of kitchens and bathrooms. The winning bidder had no more success managing the company than the old management.
UK statistics
Almost three million people in the UK are employed by companies backed by venture capital, according to the British Venture Capital Association.
Many of these companies - and the jobs they provide - might not be in existence without the injection of cash and guidance venture capitalists provide, the BVCA said.
Venture capital is usually concentrated in the newer fast growing sectors of the economy, such as the internet, and over half of all funds invested in the UK were in hi-tech firms.
These fast growth sectors often have few other alternatives to make their business plans a reality.
The UK venture capital industry has invested almost £50bn in up to 23,000 companies since 1983.
And it is still growing, with the total funds invested by UK venture capitalists in 2001 rising to £12bn, up 36% from the previous year.
