Venture capital investors are individuals or groups of investors who provide funding for new business ventures or established businesses that are attempting to expand. These types of investors earn a return for their efforts when the businesses supplied with the capital begin to earn a profit and are able to compensate the investors based on the terms and conditions agreed upon by all parties at the time that the funds were provided. In some instances, these seed capital investors are compensated with full repayment of their investments, plus any interest applied, or by receiving stocks in the company, or possibly a combination of the two approaches.
Small businesses are often the target of venture capital investors. Those small businesses may be start-up companies that demonstrate the potential to capture a significant amount of market share and become very profitable. Here, the investors provide venture capital that allows the new company to operate without cash flow woes while the business cultivates a client base and begins to work toward profitability. In many instances, venture capital investors provide financial support on an ongoing basis during this early phase, and begin to realize returns once the business does become profitable.
It is also not unusual for venture capital investors to seek out small businesses that are already established and doing well. Assuming that the successful small business is considering an expansion project, investors can provide venture capital that makes it possible to fund the construction of new company sites, develop new products, or target new types of consumers in an effort to broaden the appeal of an established line of products. The benefit to the business is that the influx of venture capital means the company can manage the projects without exhausting their own assets. For the investor, the possibility of earning a return is often quite good, since the recipient will often guarantee at least a minimum return that is protected by the company’s existing assets.
While there are potential benefits associated with this type of investment activity, choosing to become a venture capital investor does present some challenges and risks. Businesses that initially showed promise may fail instead, leading to at least a partial loss of the capital invested. In addition, venture capital investors may have to wait years before beginning to earn a return on any given investment, a factor that may be somewhat discomfiting for investors who are looking for quick turnarounds on the investments. For this reason, investors considering this type of opportunity should make sure they can afford to absorb at least some loss, and also be prepared to function without receiving any real returns for extended periods of time.