Venture Capital is private equity. Not debt, not public
offerings. Experienced, professional fund managers (venture capitalists
or VCs) invest money (roughly $500 K to $ 5 MM) in early stage companies
in return for equity (shares). Technology companies outnumber
non-technology companies three to one in money invested by venture
capitalists. Many VCs focus only on technology related companies. The
single most important factor that an entrepreneur looks for in a VC is
the value that they add beyond a cheque. Most VC's are people that have
worked in technology or even in technology start-up companies. Their
connections and expertise will help companies succeed in the risky early
stages of growth.
VCs are not in for a quick hit. The money invested is used
by the company to grow according to its business plan and is not to be
repaid, like debt. VCs are rewarded like the entrepreneurs... when the
shares of the company become liquid on public markets or through
acquisition. The increase in value of the VCs shares and the subsequent
sale or listing of those shares on a stock market, is how they are paid
back. This alignment of interest means that the investor and
entrepreneur work closely together to build the company over time.
Venture capital backed companies
outperform other companies by a large margin once they are publicly
traded. This is usually due to the management expertise built into these
companies at early stages. Once again, venture capital does not involve
stock markets. Most VCs do not invest in public companies and if so,
only rarely.
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