Venture capital (“VC”) firms supply funding from private sources for investing in select companies that have a high, rapid growth potential and a need for large amounts of capital. VC firms speculate on certain high-risk businesses producing a very high rate of return in a very short time. The firms typically invest for periods of three to seven years and expect at least a 20 percent to 40 percent annual return on their investment.
The price of financing through venture capital firms is high. Ownership demands for an equity interest in 30 percent to 50 percent of the company are not uncommon even for established businesses, and a startup or higher risk venture could easily require transfer of a greater interest. Although the investing company will not typically get involved in the ongoing management of the company, it will usually want at least one seat on the target company’s board of directors and involvement, for better or worse, in the major decisions affecting the direction of the company. The ownership interest of the VC firm is usually a straight equity interest or an ownership option in the target company through either a convertible debt (where the debt holder has the option to convert the loan instrument into stock of the borrower) or a debt with warrants to a straight equity investment (where the warrant holder has the right to buy shares of common stock at a fixed price within a specified time period). An arrangement that eventually calls for an initial public offering is also possible.
Despite the high costs of financing through venture capital companies, they do offer tremendous potential for obtaining a very large amount of equity financing and they usually provide qualified business advice in addition to capital.
Venture capital firms are located nationwide, and a directory or mailing labels are available for $35 through the Target Publishing Inc, 6 E 45th St. Suite 1000 , NY, NY 10004 .