Formal venture capital refers to Venture Capital funds which invest money in high growth unlisted companies by buying equity in the company.
These funds are organized pools of money run by professional managers. The funds raise money from institutions and other high net worth individuals and aim to deliver high returns (30% to 50%) to them.
Venture Capital investments are characterised by the following:
- Formal approach to investing
- None or minimal investment in seed stage companies. Mostly invest in start-up or later stage investments.
- The amounts of investments are large (mostly over USD 500,000). Smaller investments are not worth their while. The time spent in the evaluation of the business proposals, whether big or small, is the same and the VCs
optimise their time by investing in projects that give them maximum return on their portfolio.
- They do not have any non-financial objectives. Most do not want to participate in the daily control of the company, but rather act as advisors to steer the company in establishing its niche. The exception would be if the
ownership is incompetent; then the investors would naturally look to assume control to protect their investment.
- Traditional capitalists don't desire a long-term relationship. They want to fund your start-up or growth in exchange for equity (a lot of equity), then sell that equity for a huge profit when the company is more valuable in
3 to 7 years.
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