You may have heard about venture capitalism or VC before, but what is it? Venture capitalists range from Kobe Bryant to the cast of SharkTank.
A VC is a person or a firm who invests in a start-up or a smaller company with large growth potential. The companies that a VC invests in are usually private equity firms who are seeking investors and have promising revenues or a solid business plan.
The cast of SharkTank invests their money into promising companies in exchange for a stake in that company. This means their returns will flow into their pockets until the company they invested in diminishes or they sell their stake.
Venture capitalists are usually people who have a good amount of capital, as the minimum VC venture is about $5,000. VC’s are very fundamentally sound, and know how to sort through financial statements finding value companies.
Venture capitalists usually either experience impressive returns or tremendous downside. The amount invested and duration in the partnership highly impact the gain or loss of the VC.
Example of venture capitalism
Trevor has a bakery in NYC and needs 100,000 in funding. His business is not big enough to go to the market to raise capital so he will go to a venture capitalist. Dan who is a VC has 100,000 and likes the way Trevor runs his bakery so he decides to fund it. Dan can do one of two things.
He can give Trevor the 100,000 for a fixed interest rate until it is paid off or he could give Trevor the money for a certain % stake in the company. Either way he does it, he has the option to have an influence on the company.
How do venture capitalists spend their time?
Venture Capitalist Dana Mead explains the day in the life of a VC.
“We invest in 1-2 companies per year taking 10% of our time. With an established portfolio, we don’t have nearly the time or bandwidth to allocate 70% of our time to pick and choose companies, but when we started out that was exactly how it went.
The second thing we do is networking. We spend 20% of our time networking, this is the most fun thing we do and I usually always find a partner at a networking event that I will do business with. I do not see them as competitors but as partners.
Lastly we spend the rest of our time supporting the companies in our portfolio. The people in the company are the most important aspect as they must be versatile for the rocky road of a start-up.”