What Is a Venture Capitalist (VC)?
By Indeed Editorial Team
Updated April 1, 2021 | Published March 12, 2020
Updated April 1, 2021
Published March 12, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Funding is one of the most important parts of starting a new business. While bank loans might be an option for some business owners, raising funds through a venture capitalist (VC) is another option. VCs take on the risk of a new business in return for the potential of rapidly increasing their return on investment. In this article, we explore the various business practices of VCs and the approaches these financial experts take when investing in a new enterprise.
What is venture capital?
Venture capital is a type of private equity financing in which multiple investors combine assets to fund a startup in return for equity in the business. VCs work together to identify startups that have demonstrated good income and growth potential. By investing in these types of enterprises, the new business receives the funding needed to expand, and the VC gains another asset to strengthen its portfolio.
Common investment opportunities for VCs
Here are two situations in which venture capital investing is common:
Brand new startup business: VCs can fund a startup based on the brand's potential for profitability. The VC can act as a general partner to the brand, offering both funding and business management consultation. VCs often invest in a startup for a longer period of time in an attempt to maximize their return on investment (ROI).
Rapidly growing startup business: VCs might also choose to work with a business that has recently grown quickly, providing them with additional funding that can propel their sales and growth even higher. It is an especially good option if the business has limited funding options, such as bank loans, at the seed funding level.
VCs often take partial ownership of the business so they have control over its practices, allowing them to protect their investment. In addition to the potential for a high ROI, many VCs also require an agreement that gives them equity in the business.
Where does venture capital come from?
The funds and resources that a VC firm provides to a startup usually come from various investors. Wealthy individuals who have a large number of assets might choose to personally invest in the fund. Others might be bankers at third-party financial institutions that take a nonactive investment approach, allowing the VC firm to manage their investments.
Stages of venture capital funding
The process of distributing funds needs to be addressed on a case-by-case basis when working with startups. The different stages of funding often follow these protocols:
Pre-seed funding: Pre-seed refers to the earliest part of the funding process. Most VCs do not invest during this time because the business is too new and they have not yet demonstrated income potential.
Seed funding: During this stage, funds are obtained to help establish a business. VCs will often invest during this time to help a business take its first steps. VCs have more control over the logistics of such a new business at this step. Funding from a VC firm to a startup often starts after a round of seed funding.
Series A funding: At this stage, the business already has a stream of income. The business plan is written and marketing strategies are being tested, so the VC invests in the business as is, and funds are used to prepare the product for commercial distribution. At this level, investors expect to receive an ROI when the startup begins to sell shares through an initial public offering (IPO).
Series B funding: During Series B funding, the business is ready to develop and expand. VCs invest during this stage to help a brand take over new markets or offer additional products.
Series C funding: During Series C funding, the brand has already expanded and is ready to scale. Though less common, VCs may invest during Series C funding for a safer investment.
How is venture capital structured?
Venture capital firms are often structured as a form of business partnership. With a VC agreement, the startup is essentially selling off a portion, or share, of the business to an interested investor or group of investors. General partners are at the top of the fund and have the most control over the investments and business decisions. Some VCs are also structured as a Limited Liability Company (LLC).
The number of investors often dictates the available resources. Larger VC firms tend to have more capital and can invest in more, or larger, businesses. VCs made up of fewer investors may have limited funds available. The most common levels of investors include:
A large group of investors: With a large number of investors, their funds are consolidated and then they can determine the industries or businesses they want to work with. Some investors may be more active than others in the brand's day-to-day activity.
A few key investors: Smaller groups of VCs tend to have more active control of the businesses in which they invest. With fewer investors, funds tend to be more limited, and the group can be more selective.
A single angel investor: With a single angel investor, an individual invests in a startup in return for equity in that business.
In most cases, the VC maintains active majority ownership of the business and its rights in order to protect their interests. They may take majority voting rights and put a member of the VC firm on the board to have more control over important business decisions. Most VCs also have veto rights, meaning they have ample control over the business's day-to-day practices as well as major decisions.
Common types of VC roles
Venture capitalists are often investors who have successfully built their financial portfolios and have the funds available to invest. Responsibilities vary depending on the organization, but most VCs serve in the following roles:
General partner: General partners in a VC company contribute funds to make up the VC account. This gives them the ability to lead deals and represent the VC firm. They are bound by fiduciary and legal liabilities.
Vice president: The vice president of a VC company, sometimes also referred to as a principal identifies and funds their own smaller investments with the intention of working toward becoming a general partner.
Venture partner: The venture partner in a VC is often a working individual of the company. They may or may not invest funds in the firm.
Associate/Senior associate: The senior associate does not typically invest their own funds into the company. They often have an educational background in business or finance and act as a consultant and business professionals.
Managing director: Managing directors are senior partners who have worked in a VC previously. They are often in charge of moving deals from initial interest to early investment.
Analyst: An analyst in a VC company handles all the research and due diligence when considering investing in a startup business. They don't fund the VC with their own funds and instead provide professional consultation.
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