Definition of Venture Capital Fund

What is a venture capital fund? What is the definition of a venture capital fund?

A venture capital fund is a fund that looks to make investments in privately-held companies.

A company is traditionally started with seed money from either the owners themselves (and their friends and families) or angel investors. Once companies get off the ground and start building up their businesses, they will usually turn to venture capital investors who will provide the company with capital in exchange for an ownership stake.

Venture capitalists make their money back when a company is sold or goes public. For instance, let's say that a venture capital company provides $10 million in funding to a company in return for a 5% stake. If the company is eventually purchased by say, Google, then the venture capital firm will receive 5% of the purchase price. The structure of ownership stakes are usually considerably more complicated than this, but this is the basic gist of the business arrangement.

Venture capital firms usually spread their risk by investing in a number of different companies. One successful investment can usually pay for a number of investments that don't work out. For instance, early investors in Facebook are going to reap a massive return when the company eventually goes public (this is expected in 2012). Venture capitalists don't expect every investment that they make to pay dividends - they are instead looking to hit an occasional "home run" that will make their entire portfolio of investments profitable.

In short, venture capitalists look to make private investments in companies that have strong prospects for success going forward. Ultimately venture capitalists are concerned with making money, and this is done through a successful "exit", such as an IPO or purchase.


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