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How does venture capital work?

What do venture capitalists look for?

Venture capitalists are in the business of making money. They look for businesses that can exit via an IPO or acquisition that have the potential to provide financial returns that their investors (Limited Partners) would be happy with.

According to the NCVA, venture capitalists invest mostly in young, private companies that have great potential for innovation and growth (i.e., scalable business). They look for opportunities that are likely capable of providing the financial returns and successful exit event typically within three to seven years.

What is a scalable business for venture capitalists?

When a business model has the potential to generate growth in revenues significantly faster than its cost base, the business model is said to be scalable. As growing revenues increase the operating margin, scalable business models have the potential for earning very high profits. The key to scalable business models is to have small Costs Of Goods Sold (COGS), and a mechanism to drive demand and revenues.

What businesses have the best chance for receiving VC?

While it is conceivable any company can receive venture capital, VCs conventionally invest in the following high growth sectors or industries.

  • high technology
  • software
  • internet
  • computer
  • biotechnology
  • communications
  • medical devices
  • media
  • entertainment
  • clean energy technology
  • innovative companies within more traditional industries such as consumer products, manufacturing, financial services, healthcare services, business products & services