Venture capital (VC) is a form of private equity that funds startups and early-stage

emerging companies with little to no operating history but significant potential for
growth.
Fledgling companies sell ownership stakes to venture capital funds in return for
financing, technical support and managerial expertise.

Venture Capital investors typically participate in management, and help the young
company’s executives make decisions to drive growth.

Startup founders have deep expertise in their chosen line of business, but they may
lack the skills and knowledge required to cultivate a growing company. At the same
time, VCs specialize in guiding new companies.

Venture capital offers entrepreneurs other advantages.

Portfolio companies get access to the VC fund’s network of partners and experts.
Moreover, they can depend on the Venture Capital firm for assistance when they try
to raise more money.

Venture capital is an alternative investment that’s typically only available to

institutional and accredited investors. Pension funds, big financial institutions, high-
net-worth investors (HNWIs) and wealth managers typically invest in
Venture Capital funds.

A venture capital firm is a type of investment company that manages venture capital
funds and makes the capital from those funds available to startups.

Startups often approach VC firms to secure the funding they need to launch or
continue their operations. After performing due diligence, the firms will then loan
money to the companies they choose.

, a Venture Capital firm takes an ownership stake that’s typically less than 50% in
the startup company.
Many of the larger VC firms will then take an active interest in ensuring that the
companies they’ve invested in succeed and become profitable. They’ll do this in
many ways, including taking active interests in marketing, distribution, sales and even
more aspects of the company’s daily operations.
A Venture Capital firm’s goal is to increase the value of the startup, then profitably
exit the investment by either selling the fund’s stake or via an initial public offering
(IPO).

Venture capital firms provide funding for new companies in the early stages of
development.

There are four types of players in the venture capital industry:

● Entrepreneurs who start companies and need funding to realize their vision.
● Investors who are willing to take on significant risk to pursue high returns.
● Investment bankers who need companies to sell or take public.
● Venture capitalists who profit by creating markets for the entrepreneurs, investors
and bankers.
Entrepreneurs looking for capital submit business plans to VC firms in the hope of obtaining
funding. If the Venture Capital firm considers the business plan to be promising, it will
conduct due diligence, which entails a deep dive into the business model, product,
management, operating history and other areas pertinent to assessing the quality of the
business and idea.

Venture Capital firm also takes a deep look at the principals—everything from their
education and professional experience to relevant personal details.

Extensive due diligence is vital to making good investment decisions.

If the due diligence process is successful and the growth outlook for the business is
promising, the Venture Capital firm will offer capital in exchange for an equity stake. Often,
capital is provided in multiple rounds and the VC firm will take an active role in helping run
the portfolio company.

portfolio companies grow and evolve, they pass through different stages in the VC process
Some venture capital funds specialize in particular stages, while others may consider
investing at any time.

Seed round funding. This is the first round of VC funding, in which venture capitalists offer
a small amount of capital to help a new company develop its business plan and create a
minimum viable product (MVP).
❖ Early stage funding. Typically designated as series A, series B and series C rounds, early
stage capital helps startups get through their first stage of growth. The funding amounts are
greater than the seed round, as startup founders are ramping up their businesses.
❖ Late stage funding. Series D, series E and series F rounds are late-stage VC funding. At
this point, startup companies should be generating revenue and demonstrating robust growth.
While the company may not yet be profitable, the outlook is promising.

Venture Capital firm’s objective is to grow their portfolio companies to the point where
they become attractive targets for acquisitions or IPOs.

The venture capital firm aims to sell off its stakes at a profit and distribute the returns to its
investors.

venture capital funds are structured as limited partnerships.

General partners manage the fund and serve as advisors to the fund’s portfolio companies.

Investors in the fund are limited partners.

Multiple venture capital funds may be housed under one VC firm.

The fund then makes investments in a stable of promising companies.

The firm tends to take minority stakes of less than 50% in the fund’s portfolio companies,
with the goal of increasing their value.

Exit strategies include selling the portfolio company to another public company or taking the
portfolio company public.

The Venture Capital firm can also sell shares in the portfolio company on the secondary
market
Venture capital funds generate revenue by charging management and performance fees. The
most common fee structure is two and twenty: The VC firm charges its investors a
management fee of 2% on total assets under management (AUM), plus a performance fee
equal to 20% of profits.

Venture capital firms invest in many industries, but most VC investments are concentrated
in the tech sector. Many of the most well-known VC firms are based in Silicon Valley,

Andreesen Horowitz. Founded in 2009 by Marc Andreesen and Ben Horowitz, Andreesen
Horowitz is based in Menlo Park, Calf. This VC firm invests in early-stage startups and
growth companies in sectors like enterprise IT, gaming, social media, ecommerce and
cryptocurrency.
● Sequoia Capital. One of the top VC firms in the world, Sequoia is also based in Menlo
Park, Calf. Sequoia Capital has invested in some of the best-known tech companies in the
U.S., including WhatsApp, LinkedIn, Paypal and Zoom, among others.
● Y Combinator. Launched in 2005, this VC firm and startup accelerator is regarded as one
of the most successful startup accelerators in Silicon Valley. It has invested in more than
3,000 companies, including DoorDash, Coinbase, Instacart, Dropbox and Reddit, among
many others

Venture capital is considered a form of private equity. The clearest difference between them
is that venture capital supports entrepreneurial ventures and startups, while private equity
tends to invest in established companies.
Venture Capital
● Invests in startups
● Typically acquires stakes that are less than 50% of a company’s equity
● May participate in the management of portfolio companies
● Extremely popular in the tech sector
● Invests in companies that have yet to generate significant revenue or profits
● Generates a return when a portfolio company is sold or taken public

Private Equity
● Invests in established businesses, and often prefers financially distressed companies
● Takes a majority stake in portfolio companies
● Almost always participates actively in management and operation of portfolio companies
● Generates a return when the portfolio company is sold or taken public

Venture capital investing has traditionally been limited to accredited investors and
institutional investors. Investing in VC funds demands a substantial financial commitment
and the ability to conduct in-depth due diligence.

Retail investors who follow the venture capital industry can benefit from insights that
inform their future investment decisions.
VC investors frequently focus on new industry segments that may become engines of growth
down the line. Paying attention to these developing businesses and industries can give retail
investors ideas for their own strategies.
Rayol Hwang, the chief executive officer of Hillstone Partners, recently argued that retail
investors should play a bigger role in venture capital investing in the future.

“Using smart contracts and tokenization, venture capital can be made accessible to all
retail investors,” said Hwang.
The firm is set to launch Hillstone Finance, which will leverage blockchain technology to
offer investment opportunities that are typically off limits to retail investors.
In the UK, efforts are also being made to give retail investors access to venture capital.
Forward Partners, a VC company based in the UK, included retail investors in an IPO
conducted earlier this year