There are numerous types of investments with different levels of risks and rewards. Venture capital investing dates back to the mid-forties and in modern days it is well-known for many successes (and some failures) during the dot com boom era. Although venture capital is a system that is quite different from the stock market, many investors find it more rewarding and more hands on in comparison. It meets the needs of investors looking for more than just simple shares in a company. Let us explore how venture capital investing works and who these investors are.

Quite simply, venture capital is private funding for an upcoming business or enterprise that is not yet publically traded. These business ventures are usually very high risk and are unable to receive bank loans nor can they successfully appear on the traditional markets. This form of funding enables them to procure capital and pursue their intended operations. Venture capitalists provide this funding, in addition to their own expertise in technology, management, or other areas, in exchange for a set portion of the company’s returns and an actual say in the company’s future proceedings. Venture capital investing also includes firms that exist to bring venture capitalists together. These firms create a venture capital fund, which is a large pool of funding that is used to make investments. A venture capital firm may be private, independent, or affiliated with another financial institution. The fund the firm establishes makes a limited partnership between the members, which include one general partner and several limited partners. Firms create multiple funds, and each of these funds is given its own strategy and is managed as its members wish.

Anyone who wants to fund fledgling companies can become a venture capitalist. Generally this type of investor is very selective of the companies they invest in, and they may or may not specialize in a particular industry. These investors are willing to accept very high risk with the confidence that the companies selected will succeed in yielding significant profits in the future (which an exit is understood to occur after several years, which is traditionally around three to seven years from the start)