What is a Venture Capitalist?

A venture capitalist (VC) is a private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake. This could be funding startup ventures or supporting small companies that wish to expand but do not have access to equities markets.

Venture capitalists are usually formed as limited partnerships (LP) where the partners invest in the VC fund. The fund normally has a committee that is tasked with making investment decisions. Once promising emerging growth companies have been identified, the pooled investor capital is deployed to fund these firms in exchange for a sizable stake of equity.

Contrary to public opinion. VCs do not normally fund startups from the onset. Rather, they seek to target firms that are at the stage where they are looking to commercialize their idea. The VC fund will buy a stake in these firms, nurture their growth and look to cash out with a substantial return on investment (ROI).

Venture capitalists look for a strong management team, a large potential market and a unique product or service with a strong competitive advantage. They also look for opportunities in industries that they are familiar with, and the chance to own a large percentage of the company so that they can influence its direction.

VCs are willing to risk investing in such companies because they can earn a massive return on their investments if these companies are a success. However, VCs experience high rates of failure due to the uncertainty that is involved with new and unproven companies.

Wealthy individuals, insurance companies, pension funds, foundations, and corporate pension funds may pool money together into a fund to be controlled by a VC firm. All partners have part ownership over the fund, but it is the VC firm that controls where the fund is invested, usually into businesses or ventures that most banks or capital markets would consider too risky for investment. The venture capital firm is the general partner, while the pension funds, insurance companies, etc. are limited partners.

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