What Is a Venture Capitalist (VC)? Definitions, Examples, and Functions

When starting or growing a business, one of the critical decisions you will need is what type of financing to pursue. Many options are available, but two of the most common are venture capital and angel investing. So what is the difference between these two? This article will explore the definition of a Venture Capitalist (VC), how they work, and some of the pros and cons of extending equity to them.

What Does VC Mean?

VC stands for Venture capital. It is a type of private equity and a subcategory of institutional investing. Venture capital generally comes from well-off investors, investment banks, and other financial institutions.

For example, a venture capitalist may invest $20 million in a small startup company in exchange for a 20% stake in the business. This means that the venture capitalist now owns 20% of the company and has a say in how it is run.

What Is a Venture Capitalist?

A venture capitalist is an individual or organization that provides capital to a startup company in exchange for equity. Venture capitalists are typically high-net-worth individuals or firms that invest in early-stage companies with high growth potential.

Venture capitalists typically invest in too risky companies for traditional lenders such as banks and credit unions. In addition, these investments are often in equity financing, which means the venture capitalist takes a stake in the company.

Venture capitalists are interested in high-growth investments. They invest money in businesses that have the potential to grow very quickly. They typically want to see a return on their investment within five to seven years. After that, they will exit the company either through an initial public offering (IPO) or by selling the company to another firm.

The venture capitalist may also offer to help the startup company in other ways, such as providing advice or introductions to potential customers or partners.

Examples of a Venture Capitalist

One of the most famous venture capitalists is Peter Thiel, co-founder of PayPal and an early investor in Facebook. Thiel is known for his contrarian investing style and willingness to take risks on young companies.

Other well-known venture capitalists include:

  • Alfred Lin, Sequoia Capital
  • Bill Gurley, Benchmark Capital
  • Chris Sacca, Lowercase Capital
  • Mary Meeker, Kleiner Perkins Caufield & Byers
  • Neeraj Agrawal, Battery Ventures

Some reputed VC firms are:

  • DST Global, UK
  • EQT Ventures, Sweden
  • IDG Capital, China
  • Sequoia Capital, America
  • Tiger Global Management, USA

Types of Venture Capitalists

There are four main types of venture capitalists: corporate, institutional, angel, and seed.

  1. Corporate venture capitalists are typically large companies with their own venture capital arms, such as Google Ventures and Samsung Ventures.
  2. Institutional venture capitalists are typically investment firms that raise money from investors and then invest that money in startups. Notable institutional VCs include Sequoia Capital and Andreessen Horowitz.
  3. Angel venture capitalists are wealthy individuals who invest their own money in startups.
  4. Seed venture capitalists are typically firms that invest small amounts of money in very early-stage startups. Notable seed VCs include Y Combinator and 500 Startups.

Stages of Venture Capital Funding

There are four main stages of venture capital: seed, early-stage, growth, and mezzanine.

Seed stage: 

This is the earliest stage of venture capital funding. It is typically used to finance the initial costs of starting a business, such as research and development, marketing, and product development.

Early-stage: 

This stage is typically used to finance the expansion of a company. This can include hiring new employees, opening new offices, or expanding into new markets.

Growth stage: 

This stage is typically used to finance a company’s continued growth. This can include marketing campaigns, new product development, or acquisitions.

Mezzanine stage: 

This is the final stage of venture capital funding. It is typically used to finance a company’s expansion, such as opening new offices or expanding into new markets.

VC’s Source of Funds

Venture capitalists typically raise money from many sources, including:

High-net-worth individuals: 

Also known as “angel investors,” these people have the financial resources to invest in high-risk, early-stage companies.

Institutional investors: 

This includes pension funds, insurance companies, and endowments.

Investment banks: 

Venture capitalists often work with investment banks to syndicate deals, meaning the investment bank will help find other investors to participate in the deal.

Venture Capitalist Vs. Angel Investors

An angel investor is an individual who provides capital for a startup, usually in exchange for equity. Angel investors are typically high-net-worth individuals willing to take risks on early-stage companies.

Venture capitalists are similar to angel investors in that they both provide capital to startup companies. However, venture capitalists typically invest more money than angel investors, and they also tend to have a more hands-on role in the companies they invest in.

How Venture Capitalists Work

Venture capitalists invest in startups that have high growth potential. As the expected rate of return is high, it comes with high risks. VC firms take that risk when the risk and return make sense.

Different sources fund the VC firms. Individual investors, institutional investors, and investment banks are the most common ones. They employ highly experienced analysts to analyze startup companies. These analysts work closely to identify potential companies, meet with them, do due diligence on the company and management team, and then make a decision.

Venture capital analysts are generally looking for companies with the following common characteristics:

  • A differentiated product or service
  • In a large addressable market
  • Powered by a strong and experienced management team
  • With a business model that can scale

Based on the thorough analysis, venture capital analysts prepare reports on the next seven years’ business projection. Then they decide on what to do with the company. They also negotiate with the startup companies over the rate of return, number of board seats, and other investment conditions.

Types of Financing

There are two types of financing: equity financing and debt financing.

Equity Financing

Equity means ownership. In the equity financing, the venture capitalist provides money in exchange for a percentage of ownership (equity) in the company. The company does not have to repay the money.

The percentage of ownership depends on how much money the venture capitalist invests and what the company is worth. If the company is successful, the value will increase, and the venture capitalist’s ownership will be worth more.

Debt Financing

Debt means loan. In debt financing, the venture capitalist provides loans to the startup. The loan needs to be paid with the agreed interest.

This type of financing is less common because it is riskier for startups.

Advantages of Extending Equity to Venture Capitalists

There are several advantages to extending equity to venture capitalists. One of the most obvious is that it allows you to tap into a pool of capital that you would not otherwise have access to. This can be critical for businesses that require a large amount of up-front funding to get off the ground.

Another advantage is that venture capitalists bring more than just money to the table. They also bring experience and expertise that can be invaluable to a young company.

In addition, most venture capitalists are well-connected and can provide valuable introductions to other potential investors, customers, and partners.

Disadvantages of Financing by Venture Capital Firms

Of course, there are also some risks associated with taking on venture capital. The most obvious is that you will be giving up a portion of ownership in your company. This can be difficult to stomach, particularly if you are passionate about building a long-term, sustainable business.

Another risk is that you may be pressured to grow too quickly. While there is certainly nothing wrong with ambitious growth goals, growing too fast can often lead to problems down the road.

Finally, it is essential to remember that venture capitalists are in business to make money. This means that they will eventually want to cash out, which could put pressure on you to sell the company or take it public.

If you’re considering whether or not to take on venture capital, it’s essential to carefully weigh the pros and cons. Only you can ultimately decide what is best for your business.

How to Get Venture Capitalist Funding

The first step is to create a business plan. This will help you articulate your business goals and what you need to achieve them.

Once you have a business plan, you’ll need to start networking. This means attending industry events, meeting with potential investors, and building relationships with venture capitalists.

You can also look for venture capital firms that invest in your specific industry. Again, this will increase their chances of being interested in what you’re doing.

Finally, don’t forget to pitch your business in a compelling way. This means having a great elevator pitch and being able to articulate what makes your company unique.

If you can do all of these things, you’ll be well on your way to getting venture capital funding.

FAQ

How to find VC?

When looking for a Venture Capitalist (VC), it is crucial to find one that suits the company’s needs. There are a few ways to go about finding the right VC. The most common way is to use online resources, such as websites and directories. There are also word-of-mouth recommendations, as well as networking at industry events.

How do venture capitalists make money?

The most common way to make money as a venture capitalist is through what is called a “carry.” This is when the VC takes a percentage of the company’s profits. So, for example, if a VC has a 20% carry-on, a $100 million deal, they would make $20 million when the company is sold.

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Conclusion

A Venture Capitalist (VC) is an investor who provides capital to early-stage or startup companies in exchange for equity in the company. In other words, they become part of the company and share in its profits and losses. VCs are often called upon to provide financing when businesses need more money than what traditional lenders are willing to offer.

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Kalpataru Biswas

Kalpataru Biswas is a writer with a focus on business and career-related subjects. He has been writing for various websites since 2018 and has more than ten years of experience in driving revenue through data-driven Sales & Marketing.

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