Venture capital (VC) is a type of private equity and refers to investments made in exchange for equity in early-stage businesses. VCs are focused on funding, developing, and expanding early-stage businesses.
VCs tend to invest in ‘adolescent’-stage start-ups which have potential to grow rapidly and earn the investors 10x to 30x return on their capital over a fairly short time period: three to seven years. Typically, VCs look to invest in companies within sectors that have the capacity to tap into economies of scale and expand rapidly, often backing IT and software companies. As the percentage of companies that are able to earn such profitable returns is small, VCs tend to diversify their investments across multiple firms, often co-investing with others to minimise exposure to a single company.
VCs provide several services in addition to providing capital. They play an important role in guiding the company through the later rounds of raising capital, can help formulate and implement the business strategy and aid in appointing the management team. Given their influence on an early-stage business, however, VCs can be overly controlling and influence decisions in a way that benefits them more than the business in the long term.