Venture capital is a form of financing for a company in which you give up some level of ownership and control of the business in exchange for capital for a limited timeframe, usually 3-5 years. Venture capitalists usually exit through an Initial Public Offering (IPO), a merger, a sale of the business or a buyout.
Venture capital firms are limited partnerships or closely held corporations that invest in early-stage, risk-oriented business endeavors. Most firms usually have a general manager who serves as the fund manager with the investors serving as limited partners. The limited partners put up 99% of the money, while the general partner does all the sourcing, due diligence, investing and monitoring.
Essentially the venture firm is a group of investors who have pooled their money towards investments focused within certain parameters. The participants in venture capital firms can be institutional investors like pension funds, insurance companies, foundations, corporations or individuals.
The investment most commonly is secured with private stock in the venture or a legal instrument that can be converted to stock. Investments range from $500,000 to $5 million, although there are occasionally investments for as low as $50,000 or as high as $20 million.
Unlike banks, which seek their return through interest payments, venture firms are looking for capital appreciation. Their payoff is how much their original investment has increased. Venture firms generally are looking for a return of five to ten times the original investment.