A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. For aspiring entrepreneurs looking to locate and secure venture capital they have the option of seeking the support of a mentor capitalist. A mentor capitalist is an expert not only in acquiring capital but can also provide support and direction to early start-ups.

Venture capital general partners (also known as "VCs") may be former chief executives at firms similar to those which the partnership funds. Investors in venture capital funds are typically large institutions with large amounts of pecuniary resources. Other positions at venture capital firms include venture partners and entrepreneur-in-residence (EIR).

Venture partners "bring in deals" and receive income only on deals they work on. EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are engaged by VC firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host firm (although neither party is bound to work with each other).

Venture capital is not befitting for many entrepreneurs. Venture capitalists are very selective in determining what to invest in. They are most interested in enterprises with high growth potential, as only such opportunities are likely capable of providing the financial returns and successful exit event within the required timeframe that venture capitalists expect. Because of these strict requirements, many entrepreneurs seek initial funding from angel investors—affluent individuals who dispense capital for business start-ups, usually in exchange for ownership equity.

Investments by a venture capital fund can take the form of either preferred stock equity or a combination of equity and debt obligation, often with convertible debt instruments that become equity if a certain level of risk is exceeded. The common stock is often reserved by covenant for a future buyout, as VC investment criteria usually include a planned exit event, normally within three to seven years.

Harvesting transpires when at or after an exit event, venture capitalists labor to sell their stock, warrants, options, convertibles, or other forms of equity. Venture capitalists know that not all their investments will pay off. The failure rate of investments can be high. When a venture is unsuccessful, the entire funding by the venture capitalist is written off.

Many venture capitalists try to mitigate the risk of failure through diversification. They invest in companies in different industries and different countries so that the risk across their portfolio is minimized. Others concentrate their investments in the industry that they are familiar with.

For a company to gain easier access to venture capitalism, they should obtain a solid business plan, a good management team, investment and passion from the founders, a good potential to exit the investment before the end of their funding cycle, and target minimum returns.

Copyright 2007 Ismael D. Tabije