Venture capital (VC) firms can be the only option for some start-ups and small businesses, especially those that are high-risk in nature. There are two funding options for businesses to consider, the first is what most of us think of as a traditional loan. A bank, or other lending institution, gives the business money, which is paid back with interest. The second type of funding is when the lender receives part ownership in the business in exchange for their investment.
VC firms are funded by wealthy individuals, investment banks, pensions, and other financial institutions. Potential investments are carefully reviewed to gauge their viability and potential for long-term growth. Both the business, or product, and the management team are scrutinized to eliminate as much risk as possible.
Partnerships are at the core of any VC firm. The partners that operate the firm on a day-to-day basis are general partners. Often they are ex-CEOs or firm founders. The other partners involved in a firm are called limited partners, limited because they primarily provide the funding but are not included in day-to-day management. Profits are divided between the partners.
Venture capital firms may specialize in a particular industry, such as technology, healthcare, or real estate. Funds may also be dispersed based on a company’s stage of development, such as being a late stage company, or VC firms may focus on businesses in a particular geographic location.
Investing in start-up businesses is a very risky business. Over 70% of ventures fail or don’t last long enough for the VC firm to regain its investment. As a VC firm gets an equity stake in the company, if the company fails, the VC firm absorbs the failure as well as the founder of the company. In general, this means that there is no “pay back” owed by the company founders to the VC firm.
Venture capital firms review hundreds of proposals and select only a very small percentage of that number to actually invest in. Again, this is one reason that investment opportunities are scrutinized so carefully before capital is extended.
GSX Ventures is a real estate development and consulting firm that specializes in the discovery and the strategic re-positioning of properties to support targeted real estate developments. We work with commercial, non-profit, and educational institutions to increase the value of real estate assets throughout the country.