What is a Venture Capitalist [VC]?
Venture capital (VC) is a form of private equity financing that is provided by venture capital firms or funds to start-ups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth. This could be in terms of number of employees, annual revenue, scale of operations, etc.
Venture capital firms, through their investment funds, invest in these early-stage companies in exchange for equity, or an ownership stake.
Why do they do it?
Venture capitalists take on the risk of financing risky start-ups in the hopes that some of the firms they support will become successful. Because start-ups face high uncertainty, VC investments have high rates of failure. The start-ups are usually based on an innovative technology or specific business models or sectors and VCs may specialise is specific channels.
What do they get in return?
In exchange for the high risk that venture capitalists assume by investing in smaller and early-stage companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the companies’ ownership (and consequently value). Start-ups like Uber, Airbnb, Flipkart, Xiaomi & Didi Chuxing are highly valued start-ups, where venture capitalists contribute more than financing to these early stage firms.
Do they provide anything else?
Venture capitalists often provide strategic advice to the firm’s executives on its business model and marketing strategies along with finance, technical expertise, mentoring, talent acquisition, strategic partnership, marketing “know-how”, and business models which makes the start-up more likely to succeed.