Venture Capital

Venture capital is one of the key drivers of the stock market. A venture is simply a new business that which users an infusion of venture capital to rapidly develop a new product or service, rapidly ramp up marketing and sales efforts, rapidly ramp up revenue, rapidly ramp up profits, and then usually either sell out to a larger company or have a public offering of stock and become listing on one of the major stock exchanges.

Although venture capital can come from any source, even friends, family or your own money, the common use of the term "venture capital" is a significant amount of money which is invested by a venture capital limited partnership. A venture capital firm is typically a group of general partners who split their time between raising venture capital (from sources such as big banks, insurance companies, and large pension funds), selecting ventures to invest in, and then monitoring the performance of those investments. The venture firm itself does not typically raise or invest capital, but creates a series of limited partnerships, each of which raises a target amount of money from a target set of investors (the limited partners) and then invests that specific pool of money according to aims agreed to be the limited partners. After some period of time goes by (maybe a year or two), the firm "opens" a new limited partnership which may or may not have limited partners from a prior limited partnership and may have additional new limited partners. A new pool of money would be raised and invested separate from the investments of the prior limited partnerships.

After a few years (maybe 4 to 7, but possibly as few as 2 to 3), a venture will pursue an exit or liquidity event. This could be a sale of the business to a larger company or a public offering. Whatever the liquidity event is, the result is that the limited partnership receives their share of the proceeds, which are then distributed to the limited partners, as well as the general partners participating in that particular limited partnership. Typically, the limited partners will receive stock, and typically they will want to sell at least a portion of the stock as soon as possible, but there is usually a "lock-up" or other restriction that means that the limited partners will have to wait some number of months before they can "dump" their stock.

The benefits to the rest of us of venture capital are:

A continuous supply of "hot" new companies that we retail investors can invest in, possibly even on the IPO.
Creation of new, high-paying jobs to boost the economy.
A boost in capital spending as the ventures buy or lease office space and associated furnishings, telephone systems, computers, computer networks, and specialized equipment.