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Venture Capital Overview: Venture capital funds are highly specialized investment companies, within the broader subcategory of private equity. They buy equity stakes (that is, partial ownership) in startup companies that need seed money. Of particular interest to venture capital funds are entrepreneurs with new and innovative technologies, business processes or business strategies. Venture capital is a high risk, high reward undertaking in which every spectacular high-return success can be offset by many more money-losing failures.
Venture Capital History:The Harvard Business School Alumni Bulletin published a profile of the founder of modern venture capital in its June 2008 issue. Georges Doriot (1899-1987) was born into an entrepreneurial French family. His father was an engineer for the precursor of Peugeot Motors, and later founded his own car company. Georges emigrated to the U.S. in 1921 and, though he never graduated from college, he would become a revered professor at Harvard Business School for many years, many of whose students would go on to found major companies. During World War II, he rose to brigadier general in the U.S. Army Quartermaster Corps, decorated by the U.S., Britain and France for the innovative product development projects he led in support of the war effort. Among his many achievements after the war was his founding of the first public venture capital fund in 1946, American Research and Development Corporation (ARD). Doriot also was a major force behind the establishment of the European business school INSEAD, based in France.
Venture Capital Organization: Many venture capital funds are standalone operations that draw their investment pools from wealthy individuals, pension funds and other investment managers. Most are private companies themselves, but some have been publicly traded entities. Other venture capital funds are subsidiaries or divisions of larger financial services firms.
Venture Capital Characteristics: Venture capital funds typically have long investment horizons, that stretch over many years, perhaps a decade or more. There are several reasons for this. First, the young, untested companies in which they invest can take at least this long to mature into profitability. Second, most of the startups receiving venture capital funding are themselves private companies, which renders these investments highly illiquid until such time as they are seasoned enough to issue publicly-traded stock. Third, venture capital firms often are intimately involved in the management of the companies that they back, rather than passive investors.
Venture Capital Performance: Forbes magazine, a longtime critic of hedge funds, private equity funds and the like, claims that their investment performance is unimpressive while their fees are excessive. Forbes also critiques investment companies of this sort for opaque reporting procedures and inadequate disclosures to investors.
While landing a position in venture capital can be lucrative and prestigious, the long-term implications of Forbes’ analysis seem to be that, absent a major uptick in returns, there is bound to be a major shakeout. Investors presumably will reach a point where they decide that the odds of earning a sufficient return are too low among these funds.
Career Opportunities: Venture capital funds rely upon in-house expertise in a variety of financial disciplines, such as securities research, money management and investment banking.
Additionally, since venture capital funds frequently take a major role in decision-making at the companies in which they invest, experience in a variety of non-financial areas is sought, such as engineering, electronics, computing, the Internet, manufacturing, chemicals, pharmaceuticals, and many others. The exact non-financial skills in demand at a given venture capital fund will depend on the industries or technologies that the fund focuses upon.
In any case, multidisciplinary experience is valued especially highly, such as someone who combines an engineering or other technical background with one in financial analysis. Venture capital funds, whether standalone or part of a larger financial firm, tend to have lean staffing. This creates opportunities for large individual financial rewards, but at the cost of a frenetic pace, generally with long hours and frequent travel.