What is Venture Capital?
Venture capital turns ideas and basic research into products and services that have transformed the world. Building high growth companies from the ground up.
The Impact of VC Companies
Venture investing generates billions of dollars for investors, their institutions and creates millions of jobs. Many venture-backed companies have scaled, gone public, and become household names, and at the same time have generated high-skilled jobs and trillions of dollars of benefit for the U.S. economy.
- Fuels American Jobs
- Fuels America’s High Growth Companies
Venture-backed companies accounted for some of the largest publicly traded companies by market capitalization: Microsoft ($780B), Apple ($746B), Amazon ($737B), Alphabet ($727B), and Facebook ($374B).
Venture Investors Partner with Entrepreneurs
Entrepreneurs backed by VCs have a competitive advantage. Venture capital partners provide strategic and operational guidance, connect entrepreneurs with investors and customers, sit on company boards, and hire employees.
- With a startup, daily interaction with the management team is common and critical to the company’s success.
- VCs are experienced partners who are 100% invested in their portfolio companies.
Risk Capital for High-Growth Businesses
Venture capital supports new ideas that:
- Could not be financed with traditional bank financing.
- Threaten established products and services in a corporation or industry.
- Typically require five to eight years (or longer!) to reach maturity.
A unique institutional investor asset class. Venture capitalists create partnerships with pension funds, endowments, foundations, and others to make high-risk, long-term equity investments into innovative young companies to:
- Conduct research
- Expand workforces
- Build out new facilities
- Focus on long-term value growth activities
Venture capital has the longest asset-holding periods of any investment class and often invests in companies with little to no liquidity. In fact, the standard VC partnership agreement lasts for ten years with extensions that in practice mean the partnerships generally run even longer.
A VC Firm: Common Structure – Unique Results
Venture firms will typically will create a Limited Partnership with the investors as LPs and the firm itself as the General Partner.
- Examples of LPs include public pension funds, corporate pension funds, insurance companies, family offices, endowments, and foundations.
- Each “fund,” or portfolio, is a separate partnership.
A new fund is established when the venture capital firm obtains necessary commitments from its investors. The money is taken from Limited Partners as the investments are made through what are referred to as “capital calls.”
- An initial funding of a company will cause the venture fund to reserve three or four times that first investment for follow-on financing. Over the next three to eight years, the venture firm works with the founding entrepreneur to grow the company.
The payoff comes after the company is acquired or goes public. Although the investor has high hopes for any company getting funded, only a small portion the 2016 study How Do Venture Capitalists Make Decisions? found that, on average, 15% of a venture firm’s portfolio exits are through IPOs while about half are through an M&A.