Understanding Venture Capital
If you are somehow connected to finance or entrepreneurship, in general, you must have come across this buzz word called “Venture Capital”. Venture Capital is a method of financing start-up companies that demonstrates high growth potential and that might be a profitable investment for people that might have an interest in the operations of the business.
People are often confused between venture capital and private equity, so let’s clear the air here. Venture capital is in a way similar to private equity as both are considered as a type of funding option for businesses that are comparatively new in the market. Venture Capital is strictly focused on providing funding to businesses at an early stage. Private equity investments are generally done for companies that are established for a comparatively longer time period.
The contemporary world is witnessing more number of people starting their own businesses than ever, this naturally has led to a lot of competition among the start-ups for funding, given the paucity of funds available in the market. Survival of the fittest is going to be the norm. This is where the Venture capital firms come into play, assessing and choosing the best business to fund and help them sustain the competition with their expertise in the domain.
Venture capital firms raise capital from Limited Partners, such as pension funds, endowments, and family offices, and then invest mostly in early-stage companies with high-growth potential, for a fair stake in the business through equity. The main objective is to grow these companies and later on exit through acquisitions or initial public offerings (IPOs).
The investments are highly risky in nature and only a few percentages of the total investments in multiple companies are expected to generate the required returns, the successful ventures more than makes up for the loss incurred in unprofitable investments.
Getting into Venture Capital
While thinking about the venture capital industry, people not yet familiar with the industry dynamics generally have a perception that the finance and MBA background is a must-have. Having done your internships with Venture Capital firms certainly gives you an edge in the interviews. Your educational and professional qualifications in the financial domain is certainly an added advantage but it’s not a necessary condition for entering the Venture capital industry.
There are various capital market courses that specifically focus on a financial niche and gives you an in-depth understanding of the focused domain. People from various industries join the Venture capital industry as they bring dynamic insights from a variety of industries which makes their analysis a lot easier when it comes to funding business in a specific segment. The variety in the area of expertise adds a lot of weight when it comes to assessing businesses from different industries.
It’s paramount to understand that getting into venture capital is not a good idea for everyone with a relevant degree.
For working as a VC the most important and unsaid criteria are having a lot of experience, the experience here is not denoted by your age but by the exposure you’ve got while getting your education or through your previous jobs and internship and through the professional networks that you made while building your career. Since it takes a holistic approach for a given industry it’s important to have an area of expertise so that you can add value while associating with a particular company in your given domain.
People who have previously founded and successfully ran a start-up have an added advantage when it comes to backing the job in interviews for Venture Capital firms. The entrepreneurship experience is counted as a bonus as the funding emphasis is on nascent start-ups who are yet to grow. Having demonstrated the ability to run and grow a start-up speaks volumes when you are about to start your venture capital career.
