Start a Venture Capital Company

Summary: Are you the type of investor who is attracted to high-risk, high-return investments? Do you have the financial resources to help new and fast growing companies with their funding and management needs? Then, venture investing might be for you. Find out from our guide the basics of how this type of investing works.

If you have the money to invest and has the appetite for high-risk, high-return investments, you might consider investing in new, rapidly growing companies that have potential to bring you large returns.

People and companies that do this are called venture capitalists. They help small and fledgling companies take off by providing them capital as well as technical and administrative inputs, usually, at their startup stage.

How Does Venture Capital Investing Work

How do you become a venture capitalist? If you are an individual, you can act alone and become an "angel investor" providing low-level financing and management expertise or you can partner with another investor or become part of a group of people and institutions funding a corporation.

• If you are pursuing the plan with a partner or a group, you basically start a firm first, which is usually structured as a partnership or a corporation
• The venture firm, as your group will be called, will form a pool of funds by seeking capital commitments from other investors and institutions to raise a pre-determined amount of money. This happens with the firm seeking out prospective investors and sending them prospectus about the capital raising. Out of the capital commitments solicited, a fund will be created, which will become the legal entity transacting business in behalf of the investors. The process could take weeks to years. The fund is usually structured as an LP or an LLC, which has a fixed lifespan, usually up to 10 years.
• The venture firm will have to decide whether it wants to invest the fund in a particular industry or area or invest across industries, in various locations and in companies at different stages of development. The venture firm might also choose to concentrate on acquisitions or helping failing companies get back to financial health (turnarounds).
• The venture firm considers various investment opportunities presented to it. The firm then conducts due diligence to choose an investee company (usually among many, which could be a hundred). Typically, the firm will be given shares in the investee company and members of the venture firm become managers or directors of the company. The capital commitments will be during several stages of the company’s development.
• The firm may decide to do another round of rounds of fund raising for other investments.
• Venture firms anticipate investments to generate returns in three to five or seven years. Usually expected return on investment is 20-40%. The maturity of the investment is heralded favourably by an initial public offering of the company or a sale or merger, which shows it has gained enough footing to be able to attract investor interest.

As a venture capitalist, you help many companies get through their startup stage, while helping create jobs and fuelling the economic growth of the country.

For resources, see the National Venture Capital Association.