A subset of private equity investment, venture capital is one of the alternative investments that carry a potential for long-term growth. It specializes in financing small, early-stage, or developing businesses, which typically do not have access to capital markets or public financing. Funds gained from venture capitals are, therefore, an essential source of finances for these companies.
Venture capital is a risky asset class, but its return on investment can be substantially high upon the event of successful liquidity. Famous startups that gained from early venture capital investors are Google, Facebook, and Twitter.
One of the advantages for venture capital investors, aside from the potential for high profitability, is the opportunity to provide more than financial resources to the startup. Valuable guidance and consultation can help the firm with its decision-making, as well as legal, tax, and personnel matters.
On the other hand, a drawback with this alternative investment is the risk involved in investing in a company that has limited operating history, and, at times, high upfront costs. As for the startup, it will relinquish control, management, and a bit of ownership stake to the venture capital investor.
But due diligence in investigating the business model, products or services offered, competitive advantages, and management and operating history, among others, can result in a mutually beneficial venture capital partnership.
Charles F. Whitman is an investment strategist based in Chicago. He founded Whitman Asset Management, a firm that provides its clients with alternative investment programs that target exceptional risk-adjusted returns. To know more about him and his firm, visit this website.