What Is Venture Capital Investing – and How Can You Do It Too?

Daniel Penzing
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What Is Venture Capital?

It's typically used to support early-stage technology companies who are working on innovative new products.

These investors want to help entrepreneurs create companies that grow rapidly and generate high returns.

A venture capitalist gives money to grow a business by providing funding to startup companies.

There are three different types of startup financing: angel, venture and growth.

Angel investors, also known as business angels, give a startup company a small amount of money to help the company launch. This money is usually given in exchange for part ownership in the startup.

Venture capitalists typically give hundreds of thousands or millions of dollars to a startup business. They take on a larger share in the company but aren't looking to run the venture themselves.

Growth capital is another type of startup financing that looks to help a company expand and grow as soon as possible. The investors look to make back their money as soon as possible in order to make a bigger return.

A venture capitalist looks for high-risk, high-reward opportunities. Riskier companies could pay off big for those who invest, but there is a chance of failure.

How Venture Capital Works

When a budding business has an outstanding idea for a new product or service, getting the financial backing they need to implement that product or service can sometimes be difficult. This is where venture capital investors come in.

Venture capital investors invest money in a business with the expectation that they will reap a large return on their investment at a later date. This is different than traditional investors, who invest in a company and then hope for a small dividend check each year. Instead, venture capitalists want to see a large initial return, and then see their investments increase even more in value as the company grows.

That’s why a venture capital investment will sometimes have a huge risk factor associated with it. If your investment fails to pay off, you could lose all of your money.

What companies are venture capitalists high on right now? Take a look below:

There are thousands of different businesses that a venture capitalist could invest in, and I chose these to give you a good idea of some of the possibilities. Now that you know how venture capital works and what some of the businesses might look like, you’re probably wondering how you can get in on this exciting game.

Funding Rounds

If you want to invest in a start-up, there are only two ways of doing it:

  • become a shareholder of the start-up
  • provide capital for the start-up

The first may or may not be possible for us unless the start-up is planning an Initial Public Offering or Initial Equity Offering.

The alternative to becoming an equity shareholder is to lend the start-up money. When a start-up needs funding, they can either go to a bank or to the wealthy individuals or investment companies that back start-ups. This process is called raising capital or seeking funding.

The way a start-up raises capital is to formulate a problem statement, analyze it to extract the potential value of solution, prepare a solution, and then pitch to investors.

Most investors require a business plan before they sit down to listen to the CEO and his team.

To be sure, venture capital is most closely associated with start-ups.

Venture capital is the asset class of high-growth, high-risk companies.

In other words, venture capital is risk capital: risk" being the operative word here. And that’s why VC investments are generally illiquid.

You see, most VC investments perceive that profit potential will only present itself after three to five years, so the investor is naturally reluctant to sell.

Why Would an Investor Invest in Venture Capital?

Venture capital, or VC, is an investment class focused on early-stage companies.

If you have some cash that you are interested in turning into a business or are just curious about the whole process, there are a few essentials that you have to learn.

The first of these is what venture capital investing look like. It is an investment that puts investors directly into the management or ownership of the firm. To the average investor, this is a big and exciting commitment.

Venture capital funds are not for the fainthearted.

As an investor, you are not just throwing money into any company. You are looking for blue-chip companies that do not need the venture capital to succeed. You will have to choose carefully.

Sources of Venture Capital

Venture capital is a great option for getting your idea off the ground. It’s also great for funding a startup that can’t secure funding from traditional sources.

Here is a rundown of the various sources of venture capital:

  • Friends and Family
  • Angel Investors
  • Private Equity Investors
  • Government Grants
  • Academic Sources
  • Corporate Sources
  • Crowdfunding

Let’s take a closer look at each source:

Friends and Family

Unless you want to lose contact with your friends and family, this is probably not the best place to start looking for funds. However, if you need a little bit of cash to dip your toes in the water, you can borrow from friends and family members. You’ll need to have an ironclad agreement that outlines your responsibilities and their return on investment.

Angel Investors.

Angel Investors

Angel investors are a type of private investor who provides capital or seed money for the start of a new business, usually in exchange for a share of ownership in that business.

Unlike venture capital firms, angel investors are not professionally organized in any way, although they may belong to one of many angel groups that get together informally from time to time.

The term “angel” is based on the idea that angels help promising business enterprises to grow in return for a part of the business. That said, angel investors may provide both the capital to start a business or the expertise needed in order to get a business up and running.

Real World Examples of Venture Capital

Venture capitalists act as angel investors to help small businesses grow. Their primary focus is generally high-technology and life sciences companies that have generated a high volume of ideas but aren’t quite ready for the large venture capital firms.

Currently, there are over 16,000 active firms worldwide that are dedicated to early-stage investing.

How You Can Invest Like a Venture Capitalist

If you have ever wondered how to invest like a venture capitalist, then this article is for you.

Venture capitalists are more than just the guys your buddy Lou knows who show up late to work in a crisp suit and have a nice office. Although this is true for some VCs, others are closer to the image of the passionate entrepreneur who wants to make a difference in the world.

What is a Venture Capitalist?

A VC is an investor; a person or company that provides capital for a startup company. The goal of a VC is to invest in companies that are in the formative stages of development. The hope is that the company will become profitable, and the VCs will make a profit on their investment.

According to Vinod Dhanani, a partner at Clear Capital, a VC "is an individual or firm that provides capital for a company, in exchange for a share of the company's equity."

VCs have different ways of making money. First, they can help their companies grow, and then sell their shares at a profit. Alternatively, a VC may purchase convertible notes with an agreement that the notes will convert into stock if the company is acquired.

Most VCs also look for another exit strategy, which means that they're looking for ways to sell the company.