A look at Venture Capital

Venture Capital is an interesting niche in the Equity market. I would consider this area to probably be one of the the most exciting and involving spaces to be in.

Venture Capital traditionally finds businesses which usually have great ideas and provides bridge financing to take them from a small time operator into the big leagues in preparation for eventually going public through an IPO. In terms of financing life cycles, VC usually gets on board after an angel investor provides the financing which acts as a precursor and testing ground for the next stage.

However, as with any start up or relatively new business, there is the inherent possibility it will fail. As a result, the intensity of VC financing is fairly unique. There is low liquidity (no market to sell weak businesses) and the failure rate is quite high even with good management of earnings and milestones. However, the returns can be dramatic for the few that hit it big. The end result is a time horizon of anywhere from 2 to 7 years or beyond, but also extremely high exit multiples.

Venture Capital is also an area where fund managers have specialized backgrounds in the fields which they invest in and a wealth of experience in the area of expertise in which their companies operate. Often these companies are very small and can use the additional management or industry contacts provided by the fund. In other words, a smart entrepreneur will look for a fund which can contribute more than just capital, but also experience and network connections which can help boost operations and sales.

If you are looking for a good company to get involved in, it's always prudent to keep one eye on this part of the market. Although it is difficult to get your hands on a primary offering, watching the stock make it's eventual entry into the secondary markets can be very profitable.