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Frequently Asked Questions About Venture Capital

What kind of investors are venture capitalists?

Venture capitalists are professional investors who specialize in funding and building young, innovative enterprises. Venture capitalists are long-term investors who take a hands-on approach with all of their investments and actively work with entrepreneurial management teams in order to build great companies.

Where do venture capitalists get their money?

Most venture capital firms raise their "funds' from institutional investors, such as pension funds, insurance companies, endowments, foundations, family offices, and high net worth individuals. The investors who invest in venture capital funds are referred to as "limited partners." Venture capitalists, who manage the fund, are referred to as "general partners." The general partners have a fiduciary responsibility to their limited partners.

How many venture capital firms are there in the U.S.?

In 2010, there were 462 active US venture capital firms, defined as investing at least $5 million in companies. This compares with 1,022 such firms at the height of the tech bubble in 2000. If you define the universe of US venture capital firms as those raising money in any of the last 8 years, the 2010 count was 791. These firms managed $176.7 billion in committed capital.

What's the average size of a venture capital fund?

In 2010, the average venture fund size was $149 million.

How many companies receive venture capital financing each year?

In 2010, venture capitalists invested approximately $22 billion into nearly 2,749 companies. Of these, 1,001 companies received funding for the first time.

What types of companies and industries do venture capitalists invest in?

Venture capitalists invest mostly in young, private companies that have great potential for innovation and growth. Venture capitalists have been instrumental in developing sectors such as the computer, biotechnology and the communications industries. Today, the majority of venture capital is invested in high technology companies including software, biotechnology, medical devices, media and entertainment, wireless communications, Internet, and networking. In the last five years, the venture industry has also committed itself to investing in the clean technology sectors which include renewable energy, environmental and sustainability technologies and power management. However, venture capitalists also invest in innovative companies within more traditional industries such as consumer products, manufacturing, financial services, and healthcare services and business products and services.

What impact does venture capital have on the economy?

Venture capital activity has a significant impact on the U.S and global economies. Venture capital is a catalyst for job creation, innovation, technology advancement, international competitiveness and increased tax revenues. According to the 2011 Venture Impact study, produced by IHS Global Insight, originally venture-backed companies accounted for 11.87 million jobs and over $3.1 trillion in revenue in the United States (based on 2010 data). Those totals compare to 21% of GDP and 11% of private sector employment.

How are venture capitalists different from other investors?

Venture capitalists are long-term investors who take a very active role in their portfolio companies. When a venture capitalist makes an investment he/she does not expect a return on that investment for 7-10 years, on average. The initial investment is just the beginning of a long relationship between the venture capitalist and entrepreneur. Venture capitalists provide great value by providing capital and management expertise. Venture capitalists often are invaluable in building strong management teams, managing rapid growth and facilitating strategic partnerships.

How do venture capitalists realize a return on their investment?

The companies that venture capitalists invest in are private enterprises. Typically, the venture capitalist realizes a return on their investment when the company goes public (IPO) or is merged or purchased by another company (M&A).

What percentage of venture-backed companies succeed?

Venture capitalists invest in high-risk enterprises. However, venture capitalists manage that risk through portfolio risk management. It is estimated that 40 percent of venture backed companies fail; 40 percent return moderate amounts of capital; and only 20 percent or less produce high returns. It is the small percentage of high return deals that are most responsible for the venture capital industry consistently performing above the public markets.

How does angel investing differ from venture capital?

Venture capital firms are professional investors who dedicate 100% of their time to investing and building innovative companies on behalf of third party investors or their limited partners. The angel investment community is a more informal network of investors who invest in companies for their own interests. Typically, angel investors invest less than $1 million in any particular company, whereas venture capitalists usually invest more than $1 million per company.

What's the difference between venture capital and private equity?

Venture capital is a subset of the larger private equity asset class. The private equity asset class includes venture capital, buyouts, and mezzanine investment activity. Venture capital focuses on investing in private, young, fast growing companies. Buyout and mezzanine investing focuses on investing in more mature companies. Venture capitalists also invest cash for equity. Unlike buyout professionals, venture capitalists do not use leverage in their transactions.

What impact does corporate venture investing have on the venture industry?

Many corporations have been active venture capital investors for many years. Corporate venture capitalists often co-invest with traditional venture capitalists. Besides being savvy investors, many corporate venture capitalists provide their portfolio companies access to corporate distribution channels and potentially important strategic partners.

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