What is Technology Venture Capital?

Jim B.
Jim B.
Man climbing a rope
Man climbing a rope

Technology venture capital is money invested into the technology sector of the market that goes directly from the investor to companies that are just starting up operations. These companies lack the capacity to secure funds on the open market and seek out investors to provide the capital necessary for them to grow. Investors look to profit when one of these start-up companies improves its fortunes and is thus able to go public or to be resold at a higher value. Since their fortunes are tied up with the companies in which they invest, investors in technology venture capital often gain a say in those companies' day-to-day operations and decision-making process.

The technology industry has become one of the fastest growing sectors on the world business market. Companies from all over the world are constantly coming up with innovative new applications that can revolutionize old businesses or create new ones. Investors usually can't get to these new companies via the open market because most of these new businesses aren't established enough to be publicly traded. As a result, technology venture capital is an increasingly popular way to connect investors to these burgeoning, technology-based companies.

Investors who wish to participate in technology venture capital can do so by choosing an investment firm that focuses on the technology sector. Most of these firms require a significant minimum investment from potential investors. These firms employ investment professionals who have expertise in spotting companies that are worthwhile and in need of capital. In addition, the firms usually spread the capital around to different companies to mitigate the risk of one or more of them not reaching expectations.

Risk is an important facet of technology venture capital, because these start-up companies often have little or no track record when they go seeking capital. As such, common investment metrics such as earnings reports and cash-flow indicators aren't always reliable in these circumstances. In addition, the sheer amount of nascent technology-based companies means that there is a mathematical probability that many of them are destined to fail.

Of course, investors in technology venture capital know that there is also a potential for great gain. If the investor can stumble upon the next great computer titan or a small, unknown company with a world-changing technological advance, the profit can be practically limitless. Investors cash in when a company in which they invested goes into the public market by way of an initial public offering. They can also benefit if a company is resold, making their shares in the company worth much more.

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