Day 2 What Is Venture Capital?
- Valentina Xu
- May 16, 2018
- 2 min read
Updated: May 18, 2018
Today is my second day at CoreNetwork Fund.
Before I go into details about what I worked on today, I thought I’d introduce the industry I am learning about a bit in my blog. So, what is Venture Capital? In board terms, Venture Capital is “a form of capital provided to early-stage and high-growth companies”. Some key traits of VC from an investor’s perspective includes high risk and high return. From an entrepreneur's perspective, it is an important source of funding because small business usually do not have access to capital markets (too small) or bank debt (too risky).
One thing I found particularly interesting about the Venture Capital industry is how small the companies are in this industry. As I mentioned yesterday, the VC firm I work with now only has 3 full-time employees. I was a bit shocked by how small it is, for it can give millions of funding to other huge companies. Even the most successful VC in the U.S., Andreessen Horowitz (which manages $2.7 billion), only has around 200 employees. However, my surprise and disbelief went away as when I found out how experienced and productive the employees (venture capitalists) are. So, how does so few employees raise so much money for those companies that want to invest? Usually, independent VC firms have pools of money from institutions and wealthy individuals. For example, a big healthcare company can be interested in investing in startups that have new ideas for medical devices or new drugs. Or successful entrepreneurs who have cashed out of a business would invest in familiar sectors.
So anyone who knows how to invest can become involved in the VC industry then! Does that mean, me too (one day)? Before I get there, I am still learning a lot of the basics and working as an intern as of right now. Today I reviewed VC term sheet, as terms are always used and remembering what they imply is crucial to understand reports or, most basically, what is going on when a venture capitalist is talking to me (my sponsor or literally everyone around me in this firm). Then, I read the introduction and Chapter 1 in Venture Deals, which gave a lot of tips for entrepreneurs who seek VC fundings. Afterwards, Erik (my sponsor) gave me a startup’s deck to review and wrote a summary about it. After reading the deck and doing some additional research about the company on their website and media coverage, I wrote and turned in a summary to Erik before leaving work around 5 P.M..
On the way home, I still could not get the topic of Venture Capital off my mind. The business idea of Venture Capital never fail to fascinate me, and I really look forward learning more about how it makes investments during my time here!
@gboehm Hi Mr. Boehm, I am glad it was helpful. So as to your questions, there is something called MicroVentures, a company that combined equity crowdfunding to allow investors who are looking for small VC investment. The threshold is $100. Although VC investments are usually risky, by bringing down the money an investor must commit, the total investing risk goes down. I don't have the exact number, but VC investment decisions are usually made by very experienced venture capitalists who know the industry they are investing in well and have access to data to predict the market. So I would say not a large amount of VC investments end up losing money of the investor.
Thanks, Valentina, this clarifies things. So, back to my original questions. I know you can buy stocks for just a few dollars, but is there a similarly small amount of money that can be used to do a VC investment, or are these just for big investors? Another way to ask is, is there the equivalent of a mutual fund for VC investment where small investors can buy into a larger investment? If so, what is usually the threshold investment. Finally, given that these VC investments are riskier, what is the amount of risk? How many VC investments end up losing the money of the investor?
@gboehm Hi Mr. Boehm,
No worries, so the differences are: 1) a VC investment focuses on a new or fast growing business or start-up that have the potential for significant returns, whereas a stock investment invests in big companies that are already mature. 2) A VC investment differs from a regular bank investment by investing directly into companies, while bank investment is an intermediary in various financial transactions.
And yes, since VC investments are high-return (when the investment goes well), they are high-risk as well. Hope this helps.
I feel like I did not do a good job of asking my questions! I am wondering how a VC investment is different from a regular investment in, say, the stock market? I am assuming that the potential return is higher in a VC investment than an investment in a mutual fund, for example, and that therefore the risk is higher?
@gboehm Hi Mr. Boehm, I agree that adding graphics can help readers to understand the blog content more. I will pay attention to that in future blog posts. As to answer your questions:
1) What the minimum amount of money someone would need in order to make an investment in a start-up?
I think there is not a definitive minimum amount of money a person needs to make in investment in a start-up. But if people want to be individual investors (called "angel investors") , to withstand the loss of investment, they should worth at least $1 million or earn at least $200,000 per year.
2) What is the expected rate of return on investments?
I can't answer this question…