Venture capitalists are essentially investors with an exclusive focus on entrepreneurs and small business opportunities rather than stocks, bonds or commodities. This type of investment usually carries higher risk compared to alternatives, but it can also serve as a catalyst that fuels business growth with the potential for substantial returns for investors. While there is no single path to become a venture capitalist, those seeking employment at an established firm must demonstrate their ability and experience in the field.
The Basics of Venture Capitalism
Rather than buying shares of larger or publicly traded companies, venture capitalists exchange money for ownership of startups and small businesses that are seeking funding. After identifying a potential opportunity, investors typically devote many hours to research and analysis. This includes detailed briefings with members of the management team and examination of operational documents. Strong leadership, a large potential market, and innovative products are among the most important factors investors look for when evaluating a business idea.
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Venture capitalists can be separated into two main groups: independent investors and firms. There are virtually no restrictions on becoming an independent investor, although the personal financial risk is much higher. These so-called angel investors can have a tremendous impact on the success of new enterprises, and many established companies can attribute their rapid growth to this kind of investment. Some angel investors operate individually, but many work in small groups to share key responsibilities and mitigate potential losses.
Venture Capital Firms
Many people with interest or experience in venture capitalism seek employment at an established investment firm despite the relatively high barrier to entry. Rather than contributing personal funds, these firms use third-party capital to invest in various businesses on behalf of their clients. These investment firms usually make money alongside their clients by taking a portion of the returns. Working for a venture capital firm requires significant experience in startup management or investing as well as a proven record of success.
Role in Business Management
As primary investors in a small business, venture capitalists can wield considerable influence over the direction of the company. The level of influence completely depends on the details of the investment contract with the startup’s founders or management team. Some investors prefer a hands-off approach with minimal participation, while others become actively involved in operational and strategic decisions. In many cases, investors have voting and veto power in line with their financial contribution.
Becoming a Venture Capitalist
Becoming an entrepreneur or participating in early-stage company management is the primary pathway towards a career in venture capitalism, according to a recent Forbes article. Whether the individual wants to seek a job at a firm or become a solo angel investor, they will need an intimate understanding of business management, market analysis and challenges faced by new companies. Some tech-savvy finance and investment professionals also transition into venture capitalist careers from banking or a related industry.
New or small businesses may be a risky prospect for investors, but the potential for exponential returns continues to drive interest in the profession. Anyone with access to financial resources can become an angel investor, but venture capitalists also need knowledge, experience, and aptitude to achieve long-term success.