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Venture Capital Definition and Overview

Venture capital refers to an institutional investor asset class in which venture capital firms invest in scalable, emerging (often referred to as startup) companies with exceptional growth potential. Such investors provide money but also managerial expertise, and in exchange, seek profitable return at varying multiples to their investment typically five to eight years down the road.

Venture capitalists are extremely discerning in choosing which companies they are going to back. Conventional wisdom is that only one in 150 business plans a venture capitalist receives will be funded. Even with a high degree of selectivity, many venture capital investments fall short of expectations primarily because they are investing in unproven technologies, business models or entrepreneurs – sometimes all three. For this reason, venture capitalists invest in many companies or a portfolio of companies to diversify their risk. Venture capitalists know that of their portfolio, a few will return the amount they invested, a few will fail and maybe a few will be homeruns. The mix of breakeven, failed and homerun investments varies from firm to firm based on the prowess of the venture capitalists at the firm.

It is important to keep in mind that one-size-does-not-fit-all when it comes to venture capital. All VC firms have their own priorities, funding criteria and sectors and industries of interest which means that entrepreneurs need to do their homework before making contact with a potential backer. (Note: The ChubbyBrain Funding Discovery Engine algorithmically identifies potential investors for an entrepreneur based on these criteria and so may be one way to dramatically reduce the time to research investors).