Definition of a Venture Capitalist
A venture capitalist (or a VC) is a private investor who provides investment capital to companies in exchange for a stake in them. They’re often associated with the tech start-up industry, because VCs commonly fund start-ups and small companies that are looking to rapidly expand and increase their valuation.
It’s common for new companies to turn to venture capitalists to seek funding to scale their business or to break out into new markets. VCs invest in start-ups because if the company grows and goes public, it can provide a huge return on their initial investment.
However, venture capital investments are risky by their very nature, because it requires investors to fund companies at an early stage, before they have a proven track record of success. This also means that VC investments often fail, with most venture capitalists spreading their bets by investing in a range of different companies in the hopes that the successes will pay for the failures.
It’s important to note that VCs rarely fund start-ups right at the beginning. Instead, they normally wait for the start-ups to develop a minimum viable product (MVP) and to show early promise. They then come in when the start-up is ready to commercialize but needs investment to be able to do so.
Because they’re unable to choose their investments based on the historical performance of the companies they invest in, many venture capitalists invest based on the people behind the company. For example, if an entrepreneur has a proven history of success at their last three start-ups, a VC might be more likely to invest in them.
Venture capitalists can either work independently or they can form venture capitalist firms. These are normally created as limited partnerships, with all of the partners investing cash into a centralized fund. This fund is then overseen by a committee, often made up of the investors themselves, which is given the responsibility of identifying which companies to invest in.
When a venture capitalist invests in a firm, they’ll often also provide their own time and expertise to help the company to grow and to increase its odds of commercial success.
Who are the most well-known venture capitalists?
Just a few of the most well-known venture capitalists include Neil Shen, Lee FIxel, Jeff Jordan, Peter Fenton, Ravi Mhatre and Allen Zhu.
What do venture capitalists look for?
Different venture capitalists look for different things, and they often have specialisms that they prefer to focus on as much as possible. For example, a VC might specialize in investing in healthtech start-ups or in companies that work with blockchain.
However, as a general rule, they’ll typically look for companies that have a strong team in place, a minimum viable product, a proven target market, and a unique selling point (USP) that provides them with a competitive advantage.
What was the first venture capital company?
While it’s hard to identify the first venture capital company, we know that the first publicly-traded venture capital firm was American Research and Development Corporation (ARDC). It was formed by a Frenchman called Georges Doriot, who was also an instructor at Harvard Business School, and went public in 1946.