Venture Capital

Last updated: March 22, 2024

What Does Venture Capital Mean?

Venture capital (VC) is a type of private equity that invests primarily in early stage or turnaround companies rather than mature ones. Venture capitalists take on significant risk when investing in early stage companies, so they expect large returns, which usually come from selling or taking the company public once it has proven itself. Venture capital typically comes from friends and family first (“love money”), and then may come from either high net worth individuals (“angels”) or professional venture capital firms.


Divestopedia Explains Venture Capital

Venture capitalists expect some investments to fail, but they also expect that their wins will far outweigh these failures and also look for at least one home run company. The three most important aspects that venture capital looks for are 1) management, 2) market and 3) product.

Management must show that it has the strategic and operational capabilities to take their product or service to market in a scalable fashion. Drive and commitment is imperative in management teams seeking venture capital. They must also have a sound financial base, although oftentimes venture capitalists backstop some of the more technical financial requirements until a proper CFO is hired.

The product and the market have to be exciting and growing. Products that are easily copied, or do not show significant traction, are unattractive to venture capital. Similarly, if the product is attractive but the market is slowing down, it can also be difficult for startup companies to attract VC funding.


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