Venture capital or VC is a type of private equity investing that typically targets startup or small companies where there's an opportunity to deliver high growth and consequently high returns for investors.
What VC funds can offer is to provide capital investments raised from its own investors, often referred to as LPs or limited partners, and create pooled investment funds for the purpose of investing equity capital into these private, small businesses. These can include innovative and promising tech startups or new and innovative technologies with high growth potential. These are companies that would likely not receive financing from traditional bank loans or credit facilities.
As an asset class, venture capital is unique.
VC funds make equity investments in companies whose stock is essentially illiquid and worthless, hard to value until the company grows and matures over time. As an asset class, venture capital can offer interesting investment opportunities into new companies or new emerging sectors or sub-sectors. Businesses are usually in early stage, so may not yet be profitable and therefore will find it tricky to get any sort of debt funding. Therefore, it tends to offer a percentage of ownership in return for an equity investment so that the business can accelerate toward being profitable and generating a return to its investors.
It can be difficult to value an early stage company as there isn't usually much historic performance. To analyze or to base a valuation on companies can be considered illiquid and therefore hard to value.
VC is considered a long-term investment. This is largely due to the time it takes to grow the company. After the initial capital investment, the investment has to be made, the improvements to the company made, whether it's creating a new software platform or expanding distribution, et cetera, and then hopefully sales and then profit will be successfully driven from this adding scale and value to the overall company. When a VC fund does make an equity investment through a round of capital, there is an implied valuation of the company. However, it remains illiquid until the company has an exit, for example, an IPO or strategic sale. At that time, the company receives a market valuation and the VC funds receive a return on their investment.
Venture capital is where the investor targets younger companies with high growth potential. Usually this is by Adding, adding experience to scale up a smaller business and to drive its profit growth.
Venture capital does not take part in leveraged buyouts, which involve large acquisitions of more mature companies. Significantly financed with debt. VC is equity only investment. Growth capital, which involves purchasing a minority or non-controlling stake. in more mature companies. VCs tend to focus on new companies or turnaround companies and distressed turnarounds. Where the aim to identify companies which are currently undervalued due to temporary cashflow problems, this is not a typical investment for a VC company.
