About Venture Capitalists
A venture capitalist is an investor who provides funding to small startups hoping to provide new products and services. Startup owners accept venture capital for short-term budgetary needs in exchange for a portion of the profit given back to the investor. Venture capitalists work in an inherently risky business, seeking out businesses that offer something new for the global market. The world of venture capital requires mental agility, a high tolerance for risk and intimate knowledge of emerging industries.
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Function
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The main function of a venture capitalist is infusing funds into growing businesses through venture capital funds. These funds are used by venture capitalists to disburse investments to multiple startups with the aim of decreasing risk. For example, a venture capitalist may invest in five startup companies through his fund with the hopes of generating a return on all five businesses. The risky nature of these investments has led venture capitalists to act as more than sources of funding. Many startups rely on venture capitalists for marketing, distribution and financing advice beyond the initial investment.
Time Frame
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Most venture capitalists set a 10-year limit on their capital funds to avoid keeping money in businesses for too long. Every venture capitalist has a different time frame depending on the startup's progression at the time of the investment. Venture capitalists who specialize in providing seed funds may need to wait five years for products and services to hit the market. The seed-funding stage is preferred by some venture capitalists because it allows extensive input before startup owners have created their first product. A venture capitalist who infuses money during the late stages of a startup's funding cycle may see a return on his investment within six months.
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Features
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Every venture capitalist needs to have industry research tools, contacts within his particular industry and a diverse investment portfolio to minimize risk. Venture capitalists should look into reports by trade groups, the U.S. Chamber of Commerce and appropriate Congressional committees to stay ahead of roadblocks to startup success. The list of contacts held by a venture capitalist can be drawn from school colleagues, former co-workers, acquaintances from trade shows and family members with industry connections. The most important feature of a successful venture capitalist is a venture capital fund that is spread across different industries and levels of startup advancement.
Size
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The typical venture capitalist will supply between $1 million and $2 million in startup funds for business owners in exchange for interest, advising fees and stock options. In recent years, a subset of venture capitalists called angel investors have moved below the $1 million limit to help Internet and regional businesses. An angel investor is able to diversify his portfolio further by paying between $250,000 and $1 million to multiple startups. This shift in the size of startup funding led angel investors to overtake traditional venture capitalists in 2007 with the former group providing three-fifths of American venture capital.
Considerations
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The primary consideration for every venture capitalist is the strength of a startup owner's proposal. While venture capitalists are willing to take risks for great products, they also look at business plans and projections to determine which products will yield the greatest results in the future. Venture capitalists also recognize that great startups can be drowned out quickly in a competitive global marketplace. If a tech startup does not have a clear vision of why its product is different, it may fail as soon as its products hit stores. The final consideration for any venture capitalist is the manner of repayment once the investment has come to fruition. Most venture capitalists accept mixtures of stock options, loan interest and consulting fees that can be lucrative when investments are successful.
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Resources
- Photo Credit Photo by Nicholas Macgowan (Flickr)
