September 22, 2007
Venture Capitalist: The Dare Devil in Business
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In creating a business it is important to have a source of capital that would be used to grow the business. Venture capital is a type of investment that is usually provided by outside investors... |
In creating a business it is important to have a source of capital that would be used to grow the business. Venture capital is a type of investment that is usually provided by outside investors with the intention of financing any type of business whether it is new, growing or struggling.
A venture capital investment is a risky investment. The risk involved for the investor is really high but if all things go according to plan there is usually an above average returns obtain by the venture capitalist. The venture capitalist by the way is the person that makes the investment.
Usually a venture capitalist together with others pooled their funds together in order to create a venture capital fund which they invest in enterprises that are too risky for any standard capital markets or not qualified for any bank loans. Most of these venture capitalists are former executives of companies or firms. The businesses which they usually invest on are similar in nature to the former business they handle. This lowers down their risk to a certain degree.
Other types of venture capitalists includes large institutions that have large amount of available capital such as those coming from insurance companies, state and private pension funds, university endowments as well as pooled investment vehicles. Venture funds pooled by venture capitalists usually have a fixed life of ten years. Ten years is what venture capitalist believes to be tolerable exposure to both management and marketing risk.
Venture capitalist also allows other investors to take part on the investment however they demand that investors should maintain a commitment to continuously help in pooling the funds required for investments. A venture capitalist usually received an annual management fee equivalent to 2% out from the committed capital or out from the fund. Aside from that an additional 20% out for the net profits is also taken by the venture capitalist.
I have mentioned that venture capital fund just have a ten year duration this means that there is the possibility for the fund to run out. A skilled and knowledgeable venture capitalist is aware of this and would prepare ahead by developing several funds that will overlap each other. This way fund will not run out. Usually venture capitalist with really big amount of funds can do this.
Overlapping venture capital is an ideal way of keeping contacts with businesses. With capital continuously pouring in businesses will be able to grow and develop. And of course if business is good and earning great amount of profit so will the venture capitalist.
There are different forms of invested venture capital funds and one of which are preferred stock equity which is a combination of equity and debt obligation and usually comes with a convertible debt instrument that turns into equity if ever a certain degree of risk is reach and exceeded. Common stock is another type of investment made by a venture capitalist. This type of stock is usually reserved by a covenant intended for future buyout and this is in anticipation of a planned exit event which usually transpires within three to seven years.
However, this doesn’t mean that investment would cease in fact in most cases additional general partners joined in and invest and sometimes becomes part of the Board of Directors of the new investment venture. Their role is to assist in recruiting personnel that would fit the key management positions.
Venture capital is ideal for any type of entrepreneur that is looking for capital. However due to the high risk involved in venture capital investment venture capitalist have become very selective that is also the reason why only very few entrepreneurs are given the chance.
Recommended Reading
- Definition of Venture Capitalists
- All About Aviation Venture Capital
- Understanding Venture Capital Pools
- Helping You Understand Venture Capital in UK
- Venture Capital Directory: Finding the Best Venture Capital Firm
