What is Venture Capital (VC)?

Venture Capital (VC) is a fund that pools investments from specialized investors or institutions and invests in start-ups.¹

What is the Role of Venture Capital?

Typically, only investors who have specialized knowledge invest in venture capital funds. Venture capital firms provide equity capital to emerging companies seeking substantial funds for the first time. The fund seeks financial gains and typically exits the business once the company goes public or another entity provides capital.

Venture capital provides relatively more straightforward access to capital because raising capital from the public requires the company to adhere to several regulations. The venture capitalists also allow the promoters to manage the company with minimal interference. The tenor of investment is typically for a few years, after which the fund tends to exit the position. Since the businesses in which the fund invests are relatively new, the risk involved is high. Therefore, the fund expects a high return on its investment. Identifying profitable opportunities can be challenging for venture capitalists since the businesses may not have a financial history, and net income could be negative.

Example

Sequoia Capital is a popular Venture Capital firm based out of the US. It has invested in a wide range of sectors, namely technology, energy, media and entertainment, and retail.² A few of the successful ventures of Sequoia Capital are Uber, Instagram, Github, and Dropbox. The funds offered have helped these companies grow, and many of them have also gone public.

References

1. How Venture Capital Works. HBR.
2. What is venture capital and how does it work? Pitchbook.

Please note that this article is for educational and informational purposes and is believed to be accurate and reliable as of posting date but may be subject to change. The example above is hypothetical and is for illustrative purposes only. Alpaca does not provide investment, tax, or legal advice. Please consult your own independent advisor as to any investment, tax, or legal statements made herein.

Securities brokerage services are provided by Alpaca Securities LLC (“Alpaca”), member FINRA/SIPC, a wholly-owned subsidiary of AlpacaDB, Inc. Technology and services are offered by AlpacaDB, Inc.

This is not an offer, solicitation of an offer, or advice to buy or sell securities, or open a brokerage account in any jurisdiction where Alpaca is not registered (Alpaca is registered only in the United States).