A venture capitalist is an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to equities markets. They are wealthy individuals or firms who pump money into businesses they believe have a long-term growth potential. In return for their investment, venture capitalists gain a share in the company’s equity, and sometimes have a say in company decisions too. Venture capitalists take on substantial risk but do so with the expectation of substantial returns.
1. What is the process a venture capitalist follows before making an investment?
A venture capitalist first extensively analyses a startup or a company before deciding to invest. This process, known as due diligence, involves review of the business model, management team, market size, and the products or services. They can spend months on due diligence to understand all the potential risks and returns.
2. What do venture capitalists expect in return for their investment?
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Venture capitalists primarily expect a high return on their investments which normally comes in the form of equity in the business, or shares. They also expect a high degree of control and involvement in business decisions. In some cases, they might demand a seat on the company’s board of directors.
3. How are venture capitalists different from angel investors?
Both venture capitalists and angel investors provide funding to startups, but they differ in the source of funds and investment stages. Venture capitalists are firms that have pooled investment funds from various sources whereas angel investors are wealthy individuals investing their personal capital. Also, venture capitalists usually invest at later stages in comparison to angel investors who invest at very early or seed stages.
4. Can a venture capitalist exit their investment?
Yes, venture capitalists can exit their investment. This usually happens when the startup is acquired by another company, or goes public through an IPO. Such events provide an opportunity for venture capitalists to sell their shares and potentially make a profit.
5. Do venture capitalists only fund tech based startups?
No, while technology startups form a large part of venture capital investments, venture capitalists also invest in a wide variety of sectors like healthcare, biotech, fintech, and consumer goods among others. What’s crucial for a venture capitalist is the potential for high returns, irrespective of the industry.