All basics to know about Venture Capitals

By Ulvi Hagverdi

Your commercial awareness dose

Venture Capitals, also known as VCs, are funds provided by high net-worth individuals and organization to small businesses and start-ups that are expected to possess a high potential and generate enhanced returns on investment. They constitute a significant part of the capital markets and have played a major role in the growth of key companies, such as Google, Microsoft and Uber.

Georges Doriot, a professor from Harvard Business School, is regarded as the “father of Venture Capital”. American Research and Development Corporation (ARD), established by Doriot in 1946, has raised nearly $3 million and commercialized post-WWIII technologies. Throughout recent history, VCs become even more widespread, and as a result, they suffered historic losses during the dot com bubble following tech companies shrinking.

The capital provided to start-ups by VCs may come from a wide range of sources, such as private and public pension funds, foundations, multinational companies and wealthy individuals. With their massive sizes and impact on the growing companies, one might make an inquiry about the operation and process for selecting investment of Venture Capitals. Even though VCs are known to have a special focus on high-tech companies, some start-ups from industries such as constables and healthcare can also attract initial funds from VCs.

While deciding whether or not investing at a small business, a venture capitalist will look at various factors, such as the business plan, operations history and management. Once the VC decides to go ahead with the start-up/small business, it is accepted that a series of investment rounds at various stages will be provided for the company. The typical VC investment commences by the initial funds called “seed fund”. This is followed by the first round of investment to facilitate growth called Series A. Depending on the venture, a VC might spend nearly 5-10 years while focusing on the company. As a final step, the CV will realize the returns, which is called an exit. This usually entails the venture going through an IPO and Merger & Acquisitions.

For the founders of perspective start-ups and owners of small businesses, VCs can easily be an ideal solution to maximize the growth of your company. Venture Capitalists work closely with the ventures they invest in and offer premium guidance in terms of finances, tech and product management. The ability to re-invest the funds back to your business after VC investment, rather than paying them back to the bank as interest rates, will facilitate the growth of a company. However, one should note that this comes at the cost of the loss in decision-making and management.

Nevertheless, as some of their investment features overlap, some early beginners might confuse CVs with other capital markets terms – angel investors and private equity funds. Some key differences need to be pointed out to clear this confusion. Differently from VCs, angel investors are individuals rather than organizations that take the lead in investing. In addition, while venture capitals involvement in the venture starts from a couple of million dollars, this amount usually does not cross a million $ for angel investors. Lastly, whereas angel investors take a passive role in terms of the company’s growth, Venture Capitals take a proactive step and have a stronger say in the venture’s management.

When it comes to Private Equity Fund, the main focus of these funds are private, more established private companies with a prospect of going public in the near future and recording significant returns. On the contrast, Venture Capitals are approached by more emerging ventures that are in less mature stages of their growth.

In a nutshell, Venture Capitals, despite their relatively short future, play an undeniable role in the investment world and have triggered the growth of core companies that shape our society and global economy at the moment. As a career, a successful Venture Capitalist must have an advanced set of key skills and comprehensive business understanding to select and guide right ventures.