Venture Capital / Venture Capitalist

Defintion:

A venture capitalist is someone who invests money in startup businesses in exchange for equity in the company. Venture capitalists tend to conduct their investments as part of a larger venture capital group instead of on their own.

Simply put, venture capitalists use their money to help startups get off the ground and grow, and in return, they become part owners of the company.

Examples of venture capital firms?

As of 2022, there are approximately 1,000 active venture capital firms operating in the U.S. with a market size of $63 billion. These are some of the most prominent ones:

• Intel Capital
• Accel
• Kleiner Perkins
• Sequoia Capital
• Tiger Global Mangement
• Bessemer Venture Partners
• New Enterprise Associates
• Kholsa Ventures

While the list of well-known venture capitalists is a long one, some of the most successful and well known ones include:

• Peter Thiel: co-founder of PayPal and first outside investor in Facebook,
• Michael Moritz: represented Sequoia’s investments in Google, LinkedIn, Stripe, and many more
• John Doerr: Chairman of Kleiner Perkins and an original investor in Google and Amazon
• Keith Rabois: General Partner at Founders Fund and has provided VC funding for AirBnB, Lyft, and YouTube
• Jim Breyer: Formerly a partner at Accel, Jim was an early investors in companies like Spotify, Etsy, and Facebook

How do venture capitalists make money?

VC firms invest in startups hoping that the equity they’ve gained will turn into a big payday in the future. The hope is that with the VC's funding, a company will grow and grow until it can have an initial public offering (IPO). At that point, anyone with existing equity in the business can cash out big by selling their shares.

What are the advantages and disadvantages of securing investment from a VC?

The Pros
Resources and funding: Not only does a startup get an infusion of cash to get things going, but it also can get access to resources and support in critical areas like legal and tax that a VC firm can provide.
Business expertise: VC firms have a wealth of knowledge and business acumen that a startup can leverage.
Connections: VC firms tend to be well connected in the business community, opening up a network of opportunities for startups.

The Cons
Giving up equity: In order to secure funding from VC firms, startup founders have to give up equity in the company. Depending on how much of an investment they provide, you could become a minority shareholder and effectively hand over ownership of your business.
Loss of control: Even if you maintain a majority stake in your company, a VC firm that has invested in your business will likely want a say in shaping the company’s direction. Sharing the reins with investors can be a tough pill to swallow for some startup founders.

Private Equity vs. Venture Capital: What's the Difference?

It’s easy to get these two confused because, technically, venture capital is a type of private equity. The distinguishing factor between the two is what kind of companies they work with. Private equity firms invest in mature, stable companies past their growth stage, while VC firms invest in startups with significant upside potential.