Most venture capitalists look for companies that are ready to commercialize their idea. The VCs then fund these companies and help them grow with the goal of cashing out when it achieves the return on investment the fund is looking for. Attributes of a good company to invest in include a large potential market, strong management team, competitive advantage and a unique product or service. Most VCs also prefer to invest in industries that they are knowledgeable about and in companies that they can acquire a large ownership stake in so that they have enough influence to affect the company’s success.
How Risky Are These Investments?
Because these investments are in unproven companies, the failure rate is high. However, VCs are willing to take the risk, because the potential return is also high. VCs tend to invest in businesses that most capital markets and banks would consider too high risk.
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What Type of People Are Venture Capitalists?
The partners in VC firms may be wealthy individuals, pension funds, insurance companies, corporate pension funds or foundations. All of the partners receive an ownership stake in the fund, but the fund is under the control of the VC firm.
How Do VC Firm Partners Get Paid?
About 20% of a VC Firm’s profits are paid to the company managing the fund in the form of carried interest and management fees. The remaining 80% is divided among the limited partners, less a 2% fee that usually goes to the general partners.
What Are the Roles in a VC Firm?
Most VC firms have associates, principals and partners. Associates usually have experience in either finance, consulting or business. Principals are mid-level professionals who usually serve on the board of companies in the VC Firm’s portfolio. Their job is to make sure these companies operate profitably, job vacancies are open. Principals may become partners if they drive enough profit through the deals they make for the firm. The main role of partners is to identify and make deals with businesses to invest in.