Feb 21, 20232 min read

What is a Venture Capital Firm?

Man looking out window of a high rise building. — Venture Capital Firms invest much earlier than Private Equity Firms

What is a Venture Capital Firm?

A venture capital firm is an investment firm that provides financial capital and strategic support to early-stage start-ups or companies that have high growth potential.

The goal of a venture capital firm is to invest in start-ups or companies and help them grow in hopes of realising a significant return on investment when the company exits, either through an initial public offering (IPO) or acquisition.

Venture capital firms typically provide start-ups with the funding they need to develop their products and services, expand their operations, and hire additional employees. In exchange, the venture capital firm usually receives equity in the start-up, meaning it owns a portion of the company.

Venture capital firms typically last for as long as their limited partners (investors in the fund) want them to. A typical venture capital fund lasts for 10 years. However, some funds may last longer if the limited partners are willing to extend the fund's life.

Venture capital firms make money by investing in start-ups and companies that have the potential to grow and become valuable. If the start-up or company is successful, the value of the equity that the venture capital firm owns in the company increases. When the start-up or company exits (IPO or acquisition), the venture capital firm realises a significant return on its investment.

A managing partner is a person in charge of a venture capital firm. The managing partner is responsible for making investment decisions, managing the fund, and working with the start-ups and companies in which the fund invests.

A limited partner is an investor in a venture capital firm. Limited partners provide the venture capital firm's capital to invest in start-ups and companies. They receive a portion of the returns generated by the fund's investments.

An associate is a junior member of the venture capital firm who typically works with the managing partner and the other partners to source and evaluates investment opportunities, perform due diligence, and provide support to the start-ups and companies in which the fund invests.

What is the difference between Venture Capital Firms & Private Equity Firms?

Venture capital and private equity firms are similar in that they both invest in companies. Still, there are some critical differences between the two. Private equity firms typically invest in established companies that are already profitable but may need capital to grow or restructure. Private equity firms often focus on buying controlling stakes in these companies. In contrast, venture capital firms typically focus on providing capital to start-ups and high-growth companies in exchange for equity.

Additionally, private equity firms tend to have a longer time horizon for their investments. In contrast, venture capital firms typically have a shorter time horizon due to the high-risk nature of their investments.

About the Author

Adam Ryan is a Professor of Practice (Adjunct Professor) at Monash University and is a principal at Watkins Bay. Adam has over twenty years of start-up experience in Australia and the USA. An expert in Company Structuring for Innovation, Strategy, Mergers & Acquisitions, and Capital for early and growth-stage businesses.