October 22, 2020 An Introduction to Venture Capitalist Firms

Venture Capitalists play an important role in giving great ideas a path to becoming a reality.

It’s a rather helpless feeling to have a great business idea but no financial resources to make it happen. At the end of the day, millions of great ideas have fallen to the wayside because the entrepreneur didn’t have financial backing. That’s why venture capitalists play such an important role in giving great ideas a path towards becoming a reality.

Fortunately, there are some really solid venture capitalist organizations out there with money to invest. Companies like The Chernin Group (TCG), Sequoia Capital, New Enterprise Associates, and Goldman Sachs exist to make dreams come true. In the case of The Chernin Group, they have played a role in helping companies like Barstool Sports, Twitter, and Pandora become household names. Sequoia Capital has invested in companies like PicsArt, Instagram, and WhatsApp. You get the idea.

If you are an entrepreneur at the helm of a startup, your success is often dependent on getting the attention of groups with funding.

What is a Venture Capitalist?

A venture capitalist is an individual or group of individuals (investment firm) that gathers capital from outside investors and offers up that money as an investment in business endeavors.

For the most part, the business endeavors they invest in are riskier types of investments. These are the types of investments that traditional lenders like banks won’t touch because of risk concerns. Venture capitalists like these types of investments because they fall on the high risk/high reward part of the business continuum.

What Do Venture Capitalists Do?

It’s important to remember that the people who organize venture capitalist firms may or may not invest some of their own money in projects. Leadership is generally composed of individuals who know how to market investment opportunities to outside investors with money to invest. It’s kind of like a mutual fund. Leadership manages the fund but doesn’t necessarily invest in the fund. But you’re not just courting one benevolent investor with deep pockets; you’re looking at a team of extremely knowledgeable, highly experienced investors.

Creating an Investment Fund

The first step a venture capitalist firm has to take is to develop an investment profile, a general idea of the kinds of investments they are willing to consider. The investment profile will usually target certain types of businesses with a certain level of risk involved.

It’s worth noting that while venture capitalists generally focus on startup businesses, they do sometimes invest monies for ongoing operations. They will typically do this when they see a business venture has potential and needs help crossing the goal line.

Securing Investors

After creating investment portfolios, it’s time for the venture capitalist firm to start recruiting investors. This is not an easy task for a variety of reasons. It can be done based on a conceptual profile or a fund that already has a group of business investment opportunities that are ready to go.

The number one issue for outside investors is the risk factor. Almost all ventures that a venture capitalist will take on are high-risk investments. To appeal to investors, the “Return on Investment” (ROI) has to be commensurate with the risk. Remember, a lot of startup businesses fail within the first three years. Astute investors know this and expect ample returns for accepting such risks.

The other thing investors are sensitive about is when they will be reaping the rewards from their investments. Generally, high-level investors like to see some kind of return within five years of making that initial investment.

Managing Investments

While venture capital firms generally act as silent financial partners, they obviously have a vested interest in how companies are performing. For that reason, applicable businesses will interact with management from the venture capitalist firm. They will also abide by financial reporting obligations.

Settling Investments

When venture capitalist firms set the terms of investment, they usually put themselves first in line for repayment. Each investment fund has a contractually stated repayment objective. This objective is a key marketing component, setting expectations for investors.

For the most part, investors are expecting to see returns on their investment within five years. What usually initiates returns is an applicable company going public or being acquired by new ownership. If cash is not available for repayment, some investors are more than happy to take stock ownership in the applicable company.

Subscribe to Industry Today