Venture Capital
Venture capital is a form of financial investment aimed at supporting startup businesses that typically struggle to secure funds through traditional means like bank loans. Rather than providing loans, venture capital firms invest money in exchange for equity, or ownership stakes, in the companies they support. This type of financing is particularly directed towards young enterprises with significant growth potential, often within innovative sectors such as biotechnology and information technology. Given the inherent uncertainties in predicting a company's success, venture capital is regarded as a high-risk investment.
The original concept of venture capitalism was pioneered by Georges Doriot in the mid-20th century, leading to the creation of the American Research and Development Corporation. As technology sectors flourished, particularly during the rise of Silicon Valley, venture capital gained prominence, especially in the 1970s and 2000s. These firms typically start with seed investments to help businesses develop their models, with the potential for additional funding as the company grows. Venture capitalists often take an active role in the business, sometimes requiring a position on the board of directors to influence operational decisions. Ultimately, the main goal of venture capital investments is to enhance the value of the startups, allowing for profitable exits when the companies are sold.
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Venture Capital
Venture capital is a type of financial support given to startup businesses that cannot obtain capital, or money, through traditional financing, such as banks. Venture capital is a private investment rather than a loan; venture capital firms invest funds into a company in exchange for equity, or ownership. Venture capital commonly funds young companies with a high potential for growth. Most venture capital firms invest in innovative businesses, usually in the biotechnology and information technology industries. This type of financing seeks a large return on investment. The growth potential of a company cannot be guaranteed, however, making venture capital a high-risk investment.
Brief History
French ex-patriot Georges Doriot pioneered the modern practice of venture capitalism. He founded the American Research and Development Corporation (ARDC) in 1946, credited as the first successful venture capitalist firm. Doriot achieved a 15 percent return on his investment in more than 150 companies through the 1970s, when ARDC merged with the corporation Textron. Using Doriot's model as an example, a number of venture capital firms cropped up over the next several decades, leading to the formation of the National Venture Capital Association in 1973.
The rise of electronic and computer technology in the 1970s led to a surge in venture capital financing in this market. The emphasis on technology companies lasted through the year 2000, when the Internet bubble burst following the crash of the NASDAQ stock market. After spending several years recovering from its losses, venture capitalism regained its standing in the investment world in the mid-2000s with the rise of the Internet. Firms located in southern San Francisco, California—where many of the largest high technology companies called home—greatly benefited from renewed interest in Internet technology. As thousands of startup technology companies flocked to the West, this area was nicknamed Silicon Valley.
Venture capital continued to evolve and expand in the 2010s and 2020s with the rise of artificial intelligence and other technology. Some venture capital firms began investing smaller amounts of money in companies in their very early stages in a trend called micro venture capital. Micro venture capital funds tend to be less costly but also more risky. Common micro venture capital funds in the late 2010s and early 2020s included Cowboy Ventures, Forerunner, Homebrew, Spark Global, and Baseline Ventures. Founder of Cowboy Ventures, Aileen Lee, was the first to use the term unicorn startup in 2013 to describe startups valued over $1 billion. While less than forty companies could be described as unicorn startups in the early 2010s, by the mid-2020s, nearly 3,000 startups fit this criteria.
Overview
Venture capital usually comes from a firm. Angel investments, on the other hand, come from wealthy individuals. Venture capital firms most often give funds to young, private companies that have demonstrated a potential for rapid growth in value. Venture capital normally begins with a seed investment to allow a company to develop its business model. If the company turns a profit from this seed investment, the venture capital firm will provide more funding for continued growth. The venture capital firm may take an active role in managing and adding value to the company. Many firms require a seat on the company's board of directors to ensure a say in all operational matters. The overall goal of most venture capital firms is to increase the monetary worth of a startup company, making the firm's share of ownership more valuable before the company is sold for profit.
Bibliography
Finkel, Robert, and David Greising. The Masters of Private Equity and Venture Capital. McGraw Hill, 2010, pp. 1-14.
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