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Venture Capital, as defined by Investopedia(1), is "financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential". It acknowledges that "risk is typically high for investors," and that venture capital is an "essential source of money." Finally, Investopedia qualifies VC by reminding the reader that in exchange for the funds, venture capitalists usually get a say in startup company decisions. Despite this seemingly clear cut definition, a variety of different and institutions fall under this description in a strict sense, but differ greatly in practice.
One of the first distinctions to draw is that between venture capital and private equity. Loosely speaking in financial terms, private equity refers firms that buy companies through leveraged buyouts. Generally PE firms target mature, public, companies across all industries and aim to acquire a majority stake. Generally PE deals are larger and more secure than VC investments, though this, along with many of these distinctions, is begging to be blurred in recent years. Venture capital firms on the other hand generally target nascent firms with high growth potential, usually in the technology, bio-tech, and clean-tech sectors(2). Due to the nature of these companies, VC investments are usually smaller than PE investments, more risky, and oftentimes to not involve purchase of the entire company, though majority ownership has become a more recent trend.
Another key distinction is between VC and PE firm investment versus angel investment. Simply put, angel investors are individuals who puts their own personal finance into the growth of a small business at an early stage, also potentially contributing their advice and business experience. While this is similar in model to a VC firm, the largest difference lies in amount. Angel investors often invest only up to a few million dollars, which usually hovers around the minimum investment for any VC firms(3). Due to this funding phenomena angels are usually associated with very young businesses, and a common funding route is transitioning from angel investment to VC investment as one's company grows larger.
Yet another branch of venture capital which is oft talked about in entrepreneurship ecosystems is that of strategic investors. Strategic investment firms are affiliates of corporations that invest on behalf of their parent company. Some examples include the Peacock Equity Fund of GE/NBC Universal, Time Warner Investments of Time Warner Cable, and Steamboat Ventures of The Walt Disney Company(4). Traditional VC firms provide funds to young companies with the desire to see these companies grow, strategic investors, due to their corporate backers, have an additional strategic goal beyond just this financial growth. Sometimes strategic's invest to fill in gaps where the corporate parent might see an opportunity to strengthen itself, and sometimes they invest in complementary companies where growth could help both the corporate sponsor and nascent company. Generally these strategic investments are preparations for an eventual acquisition of the new company by the corporate backer.
After only the briefest survey of the variety in venture capital, it is clear where confusion may arise. From the differences in venture capital, private equity, and angel investment, to the differences between traditional and strategic VC, the definition from Investopedia is shown to be accurate in covering all of these, but not specific enough to detail each nuance. In the highly volatile and ever changing world of venture capital, this blog post is likely to fall to the challenge of time as the traits of the various types of venture capital change yet again.
Google Doc Link: https://docs.google.com/a/rice.edu/document/d/1QNcMWSpbXX6aHSCL6hKKj_ZCpnUv3-O0mWIPS8sRtA4/edit?usp=sharing
(4) http://www.fastcompany.com/1392582/strategic-vs-traditional-investors-lowdown-venture-capital-vet<!-- flush flush --><!-- flush flush -->
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