Venture capitalists, or VCs, are people who invest money in growing businesses in exchange for part ownership.
They don't usually invest in brand-new companies. Instead, they look for small businesses that are already making some money and need help to grow bigger.
Most VCs work for venture capital firms, which collect money from investors like banks, schools, or rich individuals. This money goes into a fund.
A group of professionals then decides which companies to invest in. If the company succeeds, the investors and the VC firm earn money by selling their shares at a higher value later on.
How VCs Helped Create Tech Giants
A venture capital firm has three main roles. Associates study trends and check if a business idea looks promising. Principals help choose which companies to invest in and sit on company boards.
Partners, the most senior group, decide how the firm spends its money and helps guide the bigger decisions.
VCs look for companies with a strong team, a good product, and a big market. They usually invest in fields they know well—like technology or healthcare—so they can help the business grow.
Unlike banks, VCs take more risk. They know that many start-ups fail. But if even one company becomes a big success, it can earn enough to make up for the losses. For example, early VC money helped companies like Google and Facebook grow.
Let's say a company called ABC Inc. wants $5 million to grow. A VC firm agrees to invest $3 million. That gives the VC a 12% share of ABC, Investopedia said.
If the company gets sold or goes public, the VC gets their money back—and more—if the company has grown in value. They might also get a seat on the company's board to help steer big decisions.
Why VCs Buy Ownership, Not Loan Money to Startups
VC firms make money in two ways: management fees and profits from successful investments. Most firms charge around 2% of the fund each year and keep 20% of the profits if the investments go well.
It's also important to know that VCs don't loan money—they buy ownership. If a company fails, the founders don't have to pay the money back.
According to HBR, Venture capital isn't the only option for entrepreneurs. Many start-ups get early help from angel investors, who use their own money, or from crowdfunding websites.
Still, if a business is growing fast and needs a lot of cash, venture capitalists might be the right partners to help take things to the next level.
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