Venture Capital Firms usually invest in companies that are looking for large investments with potential for high, rapid growth and scalability. They invest large sums of money (usually in the millions of dollars) into startups, usually on the behalf of 3rd party investors. VC Firms are incredibly selective, usually investing in one firm out of several hundred. They tend to look for companies that are already launched and growing, not traditional small businesses in the prelaunch phase.
Venture Capital Firms make their money by owning large stakes of equity in the companies they are invested in. Because this means that they will not be gaining their returns until they sell their shareholdings, profits depend on the company’s growth. With the high risk involved, these firms tend to be deeply interested in the company’s development and give considerable managerial and technical advice and counsel.
Firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisers to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited liability companies, in which case the firm’s managers are known as managing members. Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals, known as venture capitalists, and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of fund.
Within the venture capital industry, the general partners and other investment professionals of the venture capital firm are often referred to as “ venture capitalists” or “VCs”. Typical career backgrounds vary, but broadly speaking venture capitalists come from either an operational or a finance background. Venture capitalists with an operational background tend to be former founders or executives of companies similar to those which the partnership finances or will have served as management consultants. Venture capitalists with finance backgrounds tend to have investment banking or other corporate finance experience.
Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:
1. Venture partners – Venture partners are expected to source potential investment opportunities (“bring in deals”) and typically are compensated only for those deals with which they are involved.
2. Principal – This is a mid-level investment professional position, and often considered a “partner-track” position. Principals will have been promoted from a senior associate position or who have commensurate experience in another field such as investment banking or management consulting.
3. Associate – This is typically the most junior apprentice position within a venture capital firm. After a few successful years, an associate may move up to the “senior associate” position and potentially principal and beyond. Associates will often have worked for 1–2 years in another field such as investment banking or management consulting.
4.Entrepreneur-in-residence (EIR) – EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are engaged by venture capital firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host firm (although neither party is bound to work with each other). Some EIR’s move on to executive positions within a portfolio company.