Venture Capital for Medium Businesses

Friday January 30th, 2004

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Summary: Is your business growing at a rate of 30-50% per year?

Venture capital is a financing vehicle used by large institutional investors to invest in smaller companies, which can provide them with above average returns. The institutional investor is generally a limited partner while the manager or the management company is the general partner.

Venture capitalists provide money and assistance in exchange for an ownership interest in the business.

There is no finite data available to determine how many companies attempt to get venture capital funding and what percentage eventually receive the funding, because most investors are reluctant to divulge this information.

It is understood, however, that they are highly selective. Some firms have implied that they only finance about 1% of the businesses interviewed. In the words of one venture capitalist, “they do not finance small businesses; they finance young big businesses.”

Since venture capital generally has higher risk, investors require a high rate of return, as much as 35 – 40% to compensate for the risk.

Venture capitalists are looking for companies that will use the capital efficiently to create real value.

Types of Venture Capital

There are many different types of venture funds. They are often categorized by three basic parameters:

	The stage of the companies in which they invest,
	The amount of capital that they invest and
	The types of capital they invest.

Although once the mainstay of venture capital, many firms have left the seed financing stage. Fewer firms are investing in start up stage companies. Some make it a practice to only invest in companies with three- to five-year histories, in order to reduce risk.

Furthermore, most venture capital firms have specific investment conditions, too, such as the industry concentration.

Although any profitable and growth oriented business may be eligible for venture capital, the current trend for venture funds is to invest in technology companies.