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Venture Capitalists
What is a venture capitalist?
A venture capitalist is an individual who makes investments in businesses before the firm goes public. In addition to bringing money to the business venture, capitalists usually bring managerial and business-specific talent to the business, and will take assume equity and generally a board seat in return for investment in the business.
What is a venture capital fund?
A venture capital fund is a pool of financial capital, managed by a firm which invests in businesses often considered too risky for a bank to lend to or for an average investor to invest in.
What is a pool fund and why is it used?
A pool fund in VC terms is a fund that, much like a mutual fund, invests its money in several different firms rather than investing all of its money in only one firm. This format reduces risk to investors and creates a greater average upside return.
In what type of businesses to VC firm typically invest?
Although technology firms have been highly favored by many venture capitalists, VC businesses often consider all types of businesses in which they can acquire some expertise-- as long as the firm’s investment requirements are met. These details were discussed in another article.
At what stage of a business do the VC firms expect to earn a profit?
Given a choice, every VC firm would like to generate profits as soon as money is invested but, realistically, that rarely happens. Most VC firms expect to show a profit within a couple of years and rarely expect to exit an investment before three years. They do expect to exit before the seven year mark.
What type of returns do VC firms look for?
VC firms look for a minimum 40% annual rate of return from their investment. Realize they expect a return “of” and a return “on” capital invested.
In what type of businesses do VC firms want to invest?
VC firms want to invest in businesses with novel technologies which have the ability to revolutionize the industries in which they invest. This can range from food production to technology all the way to manufacturing. VC firms want returns. The category of investment from which these firms derive their return is not as important as would be expected.
Some VC firms invest in:
‧ Start-up companies or new ideas, and/or
‧ Local or regional companies, preferring not to venture too far from territory they understand
‧ Underperforming companies, and/or
‧ Specific industries such as health care or manufacturing
Examples of businesses that can revolutionize an industry:
‧ Google – offers an innovative searching capability
‧ McDonalds – Standardized fast food when there were few fast food chains.
‧ Wal-Mart – Lower price retailer offering almost every item an average family needs. Wal-mart started in small communities, established a large foothold throughout the US and eventually moved into larger markets when prices were low enough and retailing skills were high enough.
‧ Automobiles operating on hydrogen, derived from water, rather than petroleum.
Venture Capital Firm Structure
A venture capital firm is typically formed as a partnership with a general partner(s) (GP(s)) and limited partners (LP(s)).
‧ General partners manage the firm, control investor monies and the businesses in which they invest. GPs may incur unlimited financial risk if a business fails and can be liable for some corporate debts.
‧ Limited partners provide money to the VC firm to be invested and their risk is limited to the amount of money they place with the firm to be invested.
Many VC firms legally structure their firms as LLCs (limited liability corporations) in efforts to minimize risk to the partners.
Where go VC firms get investment money?
VC firms receive money from their investments from accredited investors, high net worth individuals, pension funds, insurance companies, university endowments, and- on occasion, from hedge funds.
What is an accredited investor?
In 1933, the Securities and Exchange Commission (SEC) had a change in administration and President Franklin Delano Roosevelt wanted safeguards put into place inhibiting stock manipulation and stock fraud which had occurred throughout the 1920s.
The SEC mandated that some investments required accredited investors which, in general, are individuals who have some expertise in an area and, if an individual, a net worth of at least $1 million and an annual salary of $200,000 for the past two years or $300,000 in the past two years if including a spouse (2012). The accredited investors must expect to earn the same income or more the following year.
There are some types of investments in which the SEC will only allow accredited investors to invest, including very high risk investments such as venture capital, limited partnerships, private placements (both stock and/or real estate related), hedge funds, and seed money investments.
Accredited investors generally include high net worth individuals, insurance company investment funds, banks, some types of endowments, and corporations.
DISCLAIMER: All information, content, and data in this article are sole opinions and/or findings of the individual user or organization that registered and submitted this article at Isnare.com without any fee. The article is strictly for educational or entertainment purposes only and should not be used in any way, implemented or applied without consultation from a professional. We at Isnare.com do not, in anyway, contribute or include our own findings, facts and opinions in any articles presented in this site. Publishing this article does not constitute Isnare.com's support or sponsorship for this article. Isnare.com is an article publishing service. Please read our Terms of Service for more information.Dr. Brent Lundell owns http://www.gainstreamgroup.com/, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See tVC Fund Types, Players, Structure Submitted by: Dr. Brent Lundell, PhD, MBATypes of Venture Capital Funds Let?s do a quick review of the types of venture capital funds. VC firms differ in their investment approaches. Some companies ? Invest for a quick turnaround, by going public?selling within the public equities markets ? Invest for the long-term, planning for slower growth, but strong tax benefits ? Invest in new ideas ? Invest only in their areas of expertise ? Invest anywhere in the world, as long as potential profits are strong ? Invest in fledgling and start-up companies ? Invest in established and profitable companies that need expansion assistance ? Invest only in certain, defined industries ? Invest only locally or regionally ? Invest only nationally ? Invest only internationally Venture Capital Firm Players Venture capitalists (VCs) usually come from a finance or an operational experience background...Venture Capital Basics, Part 1 Submitted by: Dr. Brent Lundell, PhD, MBAVenture capital, a subset of private equity investing, usually represents money provided by investors to small or start-up companies with perceived long-term growth potential. Venture capital can be injected into a company at any time the company wants to expand, sell-out, or merge with another company. Often VC money is invested after the start up (called the ?Seed?) phase of a business and is usually a precursor to generating a return through an IPO or trade sale of the company...A Short History of Venture Capital Submitted by: Dr. Brent Lundell, PhD, MBAIn the first half of the 20th century (1900-1950)-- with very few exceptions-- venture capital investments were made by very wealthy families like the Rockefellers (Standard Oil), the Vanderbilt family (shipping lines and railroads), and the Warburg family (financial dynasty including banking, and the US Federal Reserve). 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1. the members of a business organization that owns or operates one or more establishments
?? 1 → He worked for a brokerage house2. become taut or tauter
?? 1 → Your muscles will firm when you exercise regularly1. with resolute determination
1. strong and sure
?? 2 → Gave a strong pull on the rope2. unwavering in devotion to friend or vow or cause
?? 3 → The true-hearted soldier...of Tippecanoe3. securely fixed in place
?? 1 → The post was still firm after being hit by the car4. pleasingly firm and fresh and making a crunching noise when chewed
?? 1 → Crisp carrot and celery sticks5. not soft or yielding to pressure
?? 2 → The snow was firm underfoot6. possessing the tone and resiliency of healthy tissue
7. marked by firm determination or resolution; not shakable
?? 4 → A man of unbendable perseverence8. securely established
?? 2 → Holds a firm position as the country's leading poet9. not subject to revision or change
10. not liable to fluctuate or especially to fall
11. (of especially a person's physical features) not shaking or trembling
?? 1 → His voice was firm and confident
1. any substance that can be metabolized by an organism to give energy and build tissue
1. anything that provides mental stimulus for thinking
1. any solid substance (as opposed to liquid) that is used as a source of nourishment
1. a financial institution that sells shares to individuals and invests in securities issued by other companies
1. a reserve of money set aside for some purpose
2. a supply of something available for future use
?? 1 → He brought back a large store of Cuban cigars1. furnish money for
?? 1 → The government funds basic research in many areas?? 2 → They fund him to write the letter2. accumulate a fund for the discharge of a recurrent liability
3. invest money in government securities
4. provide a fund for the redemption of principal or payment of interest
5. place or store up in a fund for accumulation
6. convert (short-term floating debt) into long-term debt that bears fixed interest and is represented by bonds
1. a venture undertaken without regard to possible loss or injury
?? 1 → He saw the rewards but not the risks of crime?? 2 → There was a danger he would do the wrong thing1. the probability of being exposed to an infectious agent
2. the probability of becoming infected given that exposure to an infectious agent has occurred
1. a source of danger; a possibility of incurring loss or misfortune
?? 1 → Drinking alcohol is a health hazard1. take a risk in the hope of a favorable outcome
?? 1 → When you buy these stocks you are gambling2. expose to a chance of loss or damage
?? 1 → We risked losing a lot of money in this venture?? 3 → She laid her job on the line when she told the boss that he was wrong
Definition of the Term: Venture1. any venturesome undertaking especially one with an uncertain outcome
2. a commercial undertaking that risks a loss but promises a profit
1. an investment that is very risky but could yield great profits
?? 1 → He knew the stock was a speculation when he bought it1. put forward, of a guess, in spite of possible refutation
?? 1 → I am guessing that the price of real estate will rise again?? 2 → I cannot pretend to say that you are wrong1. proceed somewhere despite the risk of possible dangers
?? 1 → We ventured into the world of high-tech and bought a supercomputer2. put at risk
?? 1 → I will stake my good reputation for this
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