Venture Capital

In a cyclical economy characterized by ups and downs, such as that of the United States, the venture capital industry gains momentum during periods where the forecast is gloomier. Entrepreneurs are more cautious when starting a new business and capital fundraisers are also more difficult to be found. However, there are still some niches in which venture capital can be relatively successful. For instance, online gaming and health-care have proven to be attractive niches for venture capital, as individuals are more willing to spend their income on activities at home, whilst maintaining the need to receive medical assistance.

This does not imply that these two sectors will be attractive for years on end. Venture capitalists are always on the look out to invest their money within companies or entrepreneurial ideas that have the potential to be successful and, therefore, render plenty of money in returns. In the current financial global crisis, venture capital organizations are still willing to invest their money, although they are undoubtedly more cautious and will think twice before investing.

Venture capital organizations belong to the buy-side of the financial industry as they control a certain amount of money that can be invested or spent in assets of operating companies. The main objective of venture capital is to enable young companies to grow, and then realize the return of their investment, often by sharing their proportion with another company or private investor. Start up companies and projects usually receive their initial funding through venture capital.

The person or company that invests in their idea may not even fully understand all the complexities involved in the project, but they are willing to help these entrepreneurs build up their company. Angels are a specific type of venture capitals. They invest larger amounts of money, usually around $15,000 to $1 million, in companies that are located closely, geographically speaking. Lawyers, doctors, and successful professionals can be angels. However, most of the time angels are former entrepreneurs who have been able to develop a successful professional career and wish to help others with their own projects.

Angels do not only invest in a project, but also have their say in the business strategy and in many of the operational aspects of the company to be. Many investment banks organize groups of extremely wealthy companies and individuals that may invest their money as venture capital groups. Asset management funds and pension funds are some of these alternatives. In general, these groups invest in diversified investment strategies; investing within private companies is much more complicated and implies a close monitoring of the transaction.

Private equity firms are usually considered to be the least favorable version of venture capital. Their main strategy is to invest money in vulnerable, publicly traded organizations, in the form of long-term loans; the expectation is then on the company to return a large profit to the investor. Hedge funds are also quite common; these are regarded as high risk investors.