The partners have a window of 7 to 10 years with which to make investments, and more importantly, generate a big return.
The LPs are typically large institutions, like a State Teachers Retirement System or a university who are using the services of the VC to help generate big returns on their money. How does venture capital work?Ī venture capital firm is usually run by a handful of partners who have raised a large sum of money from a group of limited partners (LPs) to invest on their behalf. If that happens, you essentially lose management control of your company. That means that you give up part of their ownership when you bring on venture capital.ĭepending on the deal, a VC may even end up with a majority share - more than 50 percent ownerships - of a startup. On that note, part of what venture capitalists want in return for their investment is equity in a startup. If that’s not your goal - or if you see yourself running your startup forever - then venture capital is not for you. That means that a startup that accepts VC money needs to be planning for an exit of some kind, usually an acquisition or an IPO.
While you don’t technically have to “pay back” venture capital, venture capital firms are expecting a return on their investment. Disadvantages of working with venture capitalist firms They’re also well-connected with other businesses that could help you and your startups, professionals that you might want to take on as employees, and - obviously - other investors. Venture capitalists come to the table with a lot of business and institutional knowledge. The biggest advantage of working with venture capital firms is that if your startup goes under - as most do - you’re not on the hook for the money because unlike a loan, there’s no obligation to pay it back. Advantages of working with venture capitalist firms Because the investments are fairly large, your startup has to be prepared to take that money and grow. Venture capital is a great option for startups that are looking to scale big - and quickly. Why would you want to use venture capital?
The goal of a venture capital investment is a very high return for the venture capital firm, usually in the form of an acquisition of the startup or an IPO. Venture capital is financing that’s invested in startups and small businesses that are usually high risk, but also have the potential for exponential growth.
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