What the Definition of Venture Capital Doesn’t Tell You – Venture capital can be a rather complicated arrangement for beginners in the business world. While there may be lots of resources available on the topic, these articles are sometimes too technical for the ordinary person.
The definition of venture capital, in simple terms, is investment money provided by professional capitalists and venture capital firms to promising companies in the hope that the company will make more money after a few years. Aside from this definition, here are some things to discuss about this subject.
A venture fund has a relatively short lifespan. The goal, then, is to maximize profit within a short time period. Venture capitalists and investors have developed strategies and business plans that are “proven” to yield results, but this is not always the case. Remember that their aim is a return of investment in a short time frame and not the development of a lifelong business.
Aside from the profits that they seek, they also charge certain fees to pay their management staff. These fees are taken out of the venture capital fund, often causing the fund’s assets to run out sooner than expected.
As a general rule, only 10% of the investments are successful. Because of this you might wonder why these companies continue to operate. Since these Venture Capital firms have tons of money, they’ve managed to distribute their investments among several companies. The key to success, then, is to make more good investments than “bad” to offset the losses. So when everything is taken into consideration, they end up gaining more than they’ve invested.
If you consider the venture capital option, be prepared to lose control over your company for a couple of years. Because these investors and firms have spent big bucks to help your company, they also have a say on how things get done. We’re talking of major stakes here, not just a couple of hundred dollars that you borrowed from a friend.
They usually assign one or more partners to sit as members of the board to take part and know the decisions that you make as CEO of the company. At the same time, they report to the firm what they think of how you run things. This can be crucial should you need additional capital later on.
Venture capital is one way to get into business with minimal capital. But remember that there may be several requirements with which you must comply. These firms have developed plans which may have proven to be effective when employed in past businesses. But, such plans may be unsuccessful for some new and future companies.
There is the possibility of failure. Your start up may be difficult and the stakes rather high. But the gains you receive later could possibly outweigh the demands and difficulties that you face at present.
Here’s hoping this article helps you understand the definition of venture capital better. For more information, it is best to seek help from a professional. Ask a financial expert about the pros and cons of venture capital and how you can avoid the many pitfalls of this type of financing.
He can also help prepare your business proposal to make it more attractive to capitalists and angel investors. There are a few websites which provide this type of service.