A small business looking to grow often needs money for expansion. Venture capital is designed to help such early stage businesses.
Venture capital firms are generally funded by institutional investors such as pension funds, insurance companies, foundations, or high net worth individuals. These investors allocate some of their investment capital to venture firms in hopes of getting a piece of a young company that turns out to be highly profitable.
The goal of venture capital firms is to identify early stage companies with high growth potential. Ideally, they invest early for a significant ownership stake. While it is risky to invest in startups, venture capitalists don’t expect every company to make it. They use a portfolio-based approach where a lot of failed companies are more than redeemed by the success of a few profitable company sales or initial public offerings (IPOs).
Raising venture capital money is complicated. You should be sure to do your homework, hire good attorneys, and be truly certain you need outside investment before accepting venture capitalists as co-owners of your business.
by Scott Fox
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