What is Venture Capital ?
Venture capital is a type of equity capital that is private, and is typically provided to new, high-growth, high-potential companies with the notion of generating a return through an eventual event such as an IPO or sale of the firm. Venture capital usually takes the form of cash in exchange for shares in the company receiving the investment.
Venture capital usually comes via institutional investors and high net worth individuals; it is often aggregated together by dedicated investment firms.
A venture capitalist (VC) is a person who does venture investing, and they often bring managerial and technical experience to the table, as well as capital. A venture capital fund is a pooled investment often structured as an LP or LLC that often invests the capital of third-party investors in opportunities that are too risky for standard capital markets and bank loans.
Venture capital is excellent for new companies who have limited history that are not large enough to raise money in the public market and in addition are too newly formed to secure a credit via a bank loan or debt instrument. In exchange for exposure to the high risk that venture capitalists assume, venture capitalists usually get wide ranging control over company decisions; in addition to a substantial ownership of the firm and its respective value.
Prior to WWII, venture capital was known as development capital, and came from wealthy individuals and families. After WWII, private equity investments began to emerge, with the founding of the first venture capital firms, American Research and Development Corp. (ARDC) and JH Whitney & Co.
The passage of the Small Business Investment Act of 1958 made it so the SBA could license private small business investment companies (SBICs) to help with financing/management of small businesses in the United States. During the 1960 's and 70 's , venture capital firms focused on starting and expanding various companies. These companies often were working on bleeding-edge medical, data processing, or electronic technology. At one point, venture capital was known as technology finance.