![]() ![]() Regardless, they still may see thousands of entrepreneurs in a given year, making the probability that an entrepreneur will be the lucky recipient of a big check pretty small. With such a small number of investments to make, VCs tend to be very selective in the type of deals they do, typically placing just a few bets each year. While money is often plentiful, the VC’s time is very limited. The reason for this is that once each investment is made, the partners must personally manage that investment for up to 10 years. It’s not uncommon for a VC with $100 million of capital to manage less than 30 investments in the entire lifetime of their fund. It may surprise you to know VCs only write about 1,000 new checks per year so while those checks are typically larger ($2 million to $100 million) they are far less frequent. Venture capital firms make a small number of investmentsĪlthough venture capital firms have large sums of money, they typically invest that capital in a relatively small number of deals. VCs typically invest once companies have already taken on money from angel investors since they use Angels to vet deals and see some traction before they get involved. These big outcomes not only provide great returns to the fund, they also help cover the losses of the high number of failures that high risk investing attracts. ![]() Creating a big return in such a short span of time means that VCs must invest in deals that have a giant outcome. The partners have a window of 7 to 10 years with which to make investments, and more importantly, generate a big return. The LPs are typically large institutions, like a State Teachers Retirement System or a university who are using the services of the VC to help generate big returns on their money. If you can, rest assured, you'll wind up in their conference room. If you can't show that you can grow to $100 million in 4 years, you're less attractive to most VCs. The way a VC works is that they have 10 years or less to invest and return most of the capital they have raised, so they can only make investments in the fastest growing, high output companies. VCs are only interested in companies that can have a massive outcome (think "billions") in a very short period of time (think "tech startups"). How does venture capital work?Ī venture capital firm is usually run by a handful of partners who have raised a large sum of money from a group of limited partners (LPs) to invest on their behalf. The goal of a venture capital investment is a very high return for the venture capital firm, usually in the form of an acquisition of the startup or an IPO. Venture capital is financing that’s invested in startups and small businesses that are usually high risk, but also have the potential for exponential growth. But you might be wondering: How does venture capital work? What is venture capital? If you’ve been in the startup world for more than five minutes, you’ve heard the term “venture capital.” Maybe you even know founders who have raised VC money themselves. ![]()
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