Venture capital

By: EconomyWatch   Date: 23 November 2010

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Venture capital, also termed Venture or VC is a private equity capital variety offered to high potential latent companies with the intention of obtaining a return in the form of trade sale or initial public offering (IPO). Investments in VC are usually made in the form of cash in exchange of equities of the concerned company.

Institutional investors and individuals with high net worth normally contribute towards venture capital which is pooled in by investment concerns. Venture capitalists not only contribute with their capital to these investments, but also offer technical and managerial expertise. A venture capital fund is created by pooled third-party financial capital. It becomes necessary to create this pooled investment fund since bank loans and standard capital markets find investing in immature companies too risky.

New companies or companies with limited operational history find venture capital as the best option of bringing in financial capital as bank loans and debt offerings might not be easily available. Venture capitalists is exchange of the risks involved in investing in immature companies acquire significant control in making company matters and decisions. Possibility of company’s ownership is also common among venture capitalists.


Early venture capital

The Small Business Act introduced in 1958 enabled Small Business Administration of the United States to offer license to small business investment companies owned privately. Thereafter in the 1960s and 70s venture capitalist concerns channelized their investments in creating new companies. With their efforts medical, electronic and data-processing companies were created and expanded. So tremendous was the impact of venture capitalists on technology companies that they became synonymous. Fairchild Semiconductor later Venrock Associates was perhaps the first venture capital funded enterprise set up in 1959.

Kleiner Perkins, Caufield & Byers and Sequoia Capital are noteworthy venture capital companies.

Structure of venture capital firms

Venture capital firms are usually partnership in nature, where the partners function as managers of the firm. They also serve as investment advisors to the collected venture capital. Instances of limited liability venture capital companies are also existent, where the firm’s managers are called managing members. Investors investing in these limited liability companies are termed limited partners.


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